The stock market’s 23% decline since the start of the year means some investors' portfolios will currently be experiencing paper losses. This may seem like a major problem, but it is a completely normal situation for any investor to experience. After all, the stock market has a long history of experiencing bear markets, downturns and corrections.
Indeed, Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) leader Warren Buffett (Trades, Portfolio) has previously discussed the likelihood of experiencing losses. He said, “Losing some money is an inevitable part of investing and there is nothing you can do to prevent it.”
Recovery potential
Crucially, the stock market has an excellent track record of recovering from even its very worst bear markets. It has posted new record highs following every one of its previous downturns. Even huge collapses, such as the 52% loss experienced by the S&P 500 during the global financial crisis in 2008, have ultimately been fully recovered from in subsequent years.
Historically, bear markets have lasted for 10 months on average. Due to its successful recoveries over time, the S&P 500 has generated a total annual return in excess of 10% over the past 50 years. As a result, investors who hold a wide range of high-quality companies should not feel disheartened about their portfolio’s present value.
In my opinion, a falling stock market presents an opportunity to take advantage of lower valuations that are likely to only be available on a temporary basis. Companies that have low debt, a wide economic moat and a long track record of high profitability relative to peers are likely to not only survive current economic uncertainty, but may also strengthen their competitive position. Buying them now could allow an investor to generate high returns as the stock market gradually recovers.
Ignoring market noise
Ignoring the views of other investors is key to capitalizing on the current bear market. Other investors are likely to also feel downbeat about their portfolio’s performance and its future prospects. Listening to them may prompt an investor to avoid buying today’s undervalued shares. Worse still, it may lead them to sell shares in the hope of avoiding further paper losses.
In my opinion, it is crucial to focus on the track record of the stock market and company fundamentals. The past performance of equity markets acts as a constant reminder of their long-term recovery potential. Meanwhile, focusing on company fundamentals provides clear guidance that is free from emotion as to whether a specific company is worth adding to a portfolio.
Investors who are able to see the positives in the stock market’s fluctuations are more likely to use the market cycle to their advantage. This could lead to superior market timing that aids their portfolio’s long-term performance.
