The market (as measured by the S&P 500) has now fallen ~9.0% from its highs approximately one month ago, and many popular growth stocks have fallen even more. For example, Tesla is down ~15.0%, Palantir is down ~25% and Super Micro Computer is down ~23.0%. This volatility has a lot of growth-stock investors very nervous, and wondering what to do. In this special note, we share some critically important information about what is very likely to happen next in the market. It’s worth the quick read.
Current Market Environment
Market prices have been extremely volatile since the pandemic, and this latest batch of volatility over the last month has a lot of investors nervous—and wondering if they should get out of growth stocks now. Afterall, the market has been strong this year, and growth stocks have been even stronger. Is it time to sell this year’s winners and move the money into something a little bit safer?
Adding fuel to the uncertainty:
Congress just barely passed a spending resolution to avoid certain draconian economic cuts.
The Speaker of the House has been removed.
Home prices are absolutely unaffordable for many millions of Americans.
Treasury rates are soaring, making it harder and harder for the US to support its massive debt burden.
And these are just a few of the economic challenges the market is digesting.
What Comes Next
It is a near certainty that many investors will (or already have) panicked and sold some of their stocks. And they may soon be gloating and bragging if the market falls further from here (which it most certainly may).
Other investors are hanging on to everything they own, and if/when the market falls further, they will have buyer’s remorse, and many of them will sell some or all of their stocks at even lower prices than we have right now.
What Should You Be Doing?
To be completely honest, the two selling examples above may be 100% prudent, depending on your personal situation and goals. For example, if your investment horizon is less than 1-year—you should NOT be 100% invested in the stock market. You should be holding some cash, short-term bonds, money market funds and/or CDs. This way you’ll be getting a little bit of interest and basically avoiding 100% of the unsettling stock market drama that keeps many people from sleeping well at night.
On the other hand, if you are a long-term investor (meaning you have many years until you’re going to spend/need the money—for example 10-years+—then you should NOT be panicking and you should NOT be selling.
The market has one of the most amazing track records in the history of the world of increasing over the long-term. Albeit a volatile upward track record, but a powerfully upward track record nonetheless.
And predicting short-term market moves is virtually impossible, and almost always a recipe for emotional trading mistakes and sub-optimal long-term performance. For example, a lot of investors sell at times like these, and feel like winners when the market falls further and they have avoided those short-term losses. However, inevitably, many of them forget to buy back stocks at the new lower prices—and they ultimately end up missing out on the long-term price gains and stock market compounding. It’s exactly why so many investors underperform the market over the long-term.
What Else You Should Be Doing…
Trying to time the market is usually a bad decisions, and it is almost always a very bad decision if you try to time the market often (because it only takes one bad trading mistake to cause serious damage to your long-term returns).
However, rebalancing and trading around the edges is acceptable and encouraged. For example, if you have been hiding out if “safe” low-volatility stocks, now is a better time than last month to consider reallocating some of those investment dollars to more volatile growth stock opportunities (because the more volatile growth stock opportunities have fallen more than the “safe” stocks and because many of them have dramatically more long-term upside too).
The Bottom Line
Finally, and above all else, you should be investing in stocks that are consistent with your own personal long-term goals. And if this latest batch of volatility has you overly stressed out, that may be a good indication that your current holdings may not be exactly right for you.
For example, there is no shame in holding a few more lower volatility short-term bonds, CDs and money market funds, especially considering interest rates are dramatically higher than the 0.0% rate they were offering just two short years ago. Afterall, the traditional long-term “balanced portfolio” is a 60/40 mix of stocks and bonds!
However, if you are a long-term investor, your best bet is assembling a prudently concentrated portfolio of attractive long-term businesses, and then continuing to own them for the long-term! Compound growth has an incredible snowballing effect on the net value of your wealth (compound growth is the 8th wonder of the world!)
Don’t let short-term volatility (which is common and normal) prevent you from achieving your long-term goals. Disciplined long-term investing has been a winning strategy over and over again throughout history, and we believe it will be this time too.
Be smart. Know your goals. Stick to your long-term strategy!