No one wants to lose, and right now, everyone is. The stock market has been hovering at about 20% down this year while the bond market is down close to 10%. Usually, the bond market gives investors solace in times like these. The last time we saw similar conditions was in 1981—when inflation was about as rampant as today.
We’ve said time and again, the last decade spoiled investors with the performance of growth stocks. Stocks with high growth numbers in revenue but may not be making earnings have been the best investment for quite a while relative to value stocks, dividend-paying stocks, bonds, or cash. Cash rarely wins. Unless the market is down and inflation is flat, cash loses purchasing power to inflation.
Markets like this are also why we believe investors should follow an investment strategy, rather than falling in love with a winning investment. We all remember the dot-com bubble in the late 90s-early 2000s that was created with overzealous investing. During that time, the average price-to-earnings ratio for S&P companies was around 30, compared to the long-term average of 16.5. In March of 2021, the average P/E reached 32. When you see the market not making sense—fix your portfolio. You need to rebalance frequently when one position, sector, or strategy outperforms so significantly. Take your earnings and reinvest in sectors that have become underweight.
For example, in March 2020 when the pandemic shut the world down, no one was driving anywhere, and no one was flying. Energy prices plummeted as a result. However, did anybody think that they’d never get on a plane again? Did anyone believe we’d never go back to the office? The market saw this as an opportunity to invest. It was painful and even emotionally difficult to put money into Energy stocks. However, once Energy’s rebound came, it took off and is still up more than 280% today from its March 2020 low.
That opportunity is the mindset investors should have right now. Historically, the market has rebounded in the 12-18 months following a bear market. While this is not guaranteed to happen, we don’t believe Walmart, Coca-Cola, or Procter & Gamble, for example, are going out of business.
If you own a specific stock that is down more than 70% right now, understand it will take a 233% return to make your money back unless you buy more at a lower price. Remember you don’t just want to make your money back—you want to make more money. Dollar-cost averaging money into the market right now should allow you to catch the bottom and the rebound. This is the time when you can make the most forward progress. Investors tend to hold on to stocks that have made them money; however, that usually means those stocks have grown to make up a large portion of their portfolio. We believe it is time to take those profits and invest in high quality companies that are “on sale” right now.
We believe that investors should stop anchoring to the cost of the stock and look deeper into the fundamentals to determine if there is an opportunity.
If you have questions on investing through a turbulent market, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the November 5, 2022 “Henssler Money Talks” episode.