The stock market’s 8% decline since the start of the year could prompt some investors to seek a quick return on their capital.
Indeed, they may determine that today’s macroeconomic and geopolitical concerns will fail to prompt the next bear market. They may feel that factors such as ongoing fiscal and monetary policy stimulus, which have boosted asset prices over recent years, will ultimately trump present risks.
As a result, they may buy stocks to benefit from what they anticipate will be a quick rebound for the wider market.
An uncertain outlook
However, a stock market surge is not guaranteed to take place in the short run. Indeed, economic, geopolitical or any other type of risk may be the catalyst for further share price falls. In fact, they could even cause the next bear market to take place in the absense of the fiscal stimulus that has largely been responsible for the market's record bull run.
As such, I believe it is imperative for investors to maintain a long-term time horizon when investing in today’s stock market environment. Doing so could aid them in overcoming any further stock market fall, since they may be less likely to sell holdings at a loss if they are prepared to hold them for the long term.
Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) Chairman Warren Buffett (Trades, Portfolio) has previously commented on the importance of taking a long-term view when investing in the stock market. As he once said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
Forecasting limitations
In my view, Buffett’s long-term approach is particularly useful at the present time. Previous bear markets have only seemed obvious after their occurrence. For example, stock prices surged to unjustifiably high levels during the dot-com bubble, while risks being taken across the banking sector suggested major problems were ahead for the financial system in the mid-2000s.
However, it was impossible to know the extent to which stock prices would ultimately be affected in either instance. Investors who bought following a modest fall in the stock market in the early part of the dot-com crash or towards the start of the global financial crisis in the hope of making a quick profit are likely to have been severely disappointed by their returns.
Conversely, investors who purchased stocks at the same time, but with a long-term view, are likely to have suffered initially. However, since they allowed their holdings sufficient time to recover, they are likely to have benefitted from the subsequent bull market.
Company fundamentals
Since the stock market could continue its recent fall or enjoy a bounce back over the short run, companies with solid fundamentals are likely to offer the most compelling risk/reward opportunities.
In a period of economic challenges, firms with low debt levels, wide economic moats and solid management teams may be better able to overcome difficult trading conditions. Those same businesses may also enjoy superior performance to their peers in a period of economic and stock market growth. As such, they could be the most logical stocks to own at the present time. When combined with a long-term view, they could offer relatively attractive risk/reward opportunities.
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