After almost two years of volatility, a stock market rally may have finally just kicked off. Since the end of October, the FTSE 250 is up in double digits. And with the economic outlook improving for the UK, this upward trajectory appears to be on track to continue into 2024.
There’s no way of knowing for certain whether the long-awaited recovery has finally started. And it’s possible for stocks to continue moving in the wrong direction next year, especially if inflation surges again.
Personally, I remain cautiously optimistic. So, let’s assume we’re entering a new British bull market. What does this mean for investors? And how should they prepare their portfolios?
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The rare opportunity
Throughout history, the stock market has endured a long list of meltdowns, crashes, and corrections. And in every instance, top-notch shares have bounced back pushing the financial markets to new heights. The pain of such events stays vivid in my memory. But despite popular belief, periods of severe decline are actually pretty rare.
In the last 20 years, there have only been three major market downturns. That includes the 2020 Covid-Crash, which was exceptionally short-lived and deliberately inflicted to combat the pandemic. In fact, excluding 2020, the last time the stock market suffered a decline as severe as 2022 was back in 2008.
That’s 14 years of tremendous performance. And for investors who capitalised on the aftermath of the Financial Crisis, enormous sums of wealth have been created, even after the recent volatility.
Another crash or correction is almost certain to happen again in the future. The question is, when will it occur? Sadly, there’s no way of knowing until it happens. But suppose the new bull market ends up being nearly as long as the last one? In that case, investors may have to wait over a decade for another chance to snap up widespread discounts across fantastic companies.
2024 will still be risky
Even if 2024 becomes the formal launch of a new bull market (which isn’t guaranteed), investors will still have to keep risk in check. The stock market as a whole may have survived previous crashes and corrections, but that doesn’t mean every business did. And I’m confident multiple bankruptcies will start to emerge next year as overleveraged businesses fail to keep up with higher interest rates.
Cracks in the foundations of businesses will likely only get wider if cash flows can’t keep up. But even those that can bring debt under control may still fall behind healthier competitors that can dedicate all their resources to growth rather than repair. That’s why I believe having a strong balance sheet will be a powerful asset next year.
Obviously, that’s not the only important factor. A management team with a talent for capital allocation and creating sustainable competitive advantages are just as crucial. As are the countless other factors that go into the stock-picking process. And even after performing all the due diligence, an investment may still fail to live up to expectations due to an unforeseen threat or disruption.
Risk is an unavoidable part of an investing journey. However, even with this handicap, employing tactics like diversification and pound cost averaging can help keep risk in check. And in the long run, a well-balanced portfolio can reap potentially massive returns, especially when it’s built near the start of a new bull market.
