As hard as it’s been to see my portfolio dwindle in value, I believe the market sell-off we’re seeing in 2022 is actually very healthy. In fact, I think it could potentially be the best buying opportunity of the decade.
It had to happen
Hindsight is a wonderful thing. Nevertheless, it is possible to look back and identify a few warning signs as to why the global markets are behaving as they are.
For one, there were a lot of unprofitable growth companies trading on obscenely high valuations as 2021 came to an end. That’s fine when everyone’s bullish, less so when interest rates (inevitably) move higher.
Second, the recovery from the pandemic felt overdone in even high-quality, established companies. When a company like Amazon doubles in value in just over 12 months, you get the sense that everything is priced to perfection. As expectations rise, so does the risk of disappointment.
Reframing the stock market sell-off
As a fully signed-up Fool, I’m an advocate of adopting a ‘glass-half-full’ attitude. What makes me particularly positive right now is that sentiment hasn’t been this low since the beginning of the Covid-19 pandemic, at least according to measures such as the Fear vs Greed Index on CNN Business.
That may sound counter-intuitive but history has consistently shown this to be the great buy signal. Just think back the Financial Crisis of 2007-2009 and the decade-or-so bull market that followed. Such is the topsy-turvy world of investing.
In my view, all of the issues market participants are currently obsessing over are also temporary in nature. Supply chains will normalise, inflation will ease, the Ukraine-Russia conflict will mercifully end. In the meantime, Mr Market is reminding investors of the importance of valuation and not succumbing to hype. He’s also offering me great stocks at great prices.
Here’s what I’m doing
My strategy for dealing with this stock market sell-off is three-fold. First, I’m continuing to drip-feed money into existing positions. For example, my buys this month have included topping up my holdings in Smithson Investment Trust and Montanaro European Smaller Companies Trust.
Both of these have badly underperformed relative to the FTSE 100 this year (down 35% and 39% respectively). However, I’m confident both quality-focused funds will outperform in the long term, even after fees.
Second, I’m continuing to build a watchlist of stocks I’d consider snapping up if the market sell-off continues. For added protection, I’m making sure that these come from a wide variety of sectors rather than just one or two.
Third, I’m taking time out from the market. After all, there comes a point where further analysis delivers diminishing returns. So long as the investments I’ve made are in accord with my financial goals, risk tolerance and time horizon, it’s probably best to switch off from all the daily noise.
Have we seen the bottom?
With talk of a recession getting louder, it’s easy to think things will get worse before they get better.
The positive news is that evidence shows this should matter less and less as the weeks, months and years pass. So long as I’m able to buy when sentiment is low rather than high (i.e. now!), I can be pretty confident of being rewarded over the next decade and beyond.
