If 2022 had a mantra for value investors, it would be “Don’t panic.” Inflation, rising interest rates and Russia's invasion of Ukraine have created what’s looking like a down market this year.
The rollercoaster ride of the U.S. stock market is dizzying, with the S&P 500 down 17% so far this year after being up 29% in 2021.
While some investors have sold in recent days, even at a loss, times like these can be golden opportunities for value investors to pick up shares of quality stocks at bargain prices and hold them for eventual gains.
As Warren Buffett (Trades, Portfolio) has famously said, “Be fearful when others are greedy and greedy when others are fearful,” meaning down markets can be a great time to invest and wait for the profits to roll in.
It is not clear yet if the U.S. has entered a recession, but financial worries tend to be on the minds of many Americans since they are paying more for food and fuel while seeing their portfolios decrease in valuation.
Value investors can come out of market slumps and troubled economies by keeping these investing ideas in mind.
Don’t sell low
If you know the shares you have are from a quality company whose stock will rise from a slump, don’t let a down market scare you into selling at a loss. Unless the funds are needed for an emergency, you should never sell shares from a profitable company when they’re down. You’re only locking in losses, and those value shares are likely to rebound.
Don’t leave the market
It may contribute to a lot of ulcers, but often the low days of the market are situated close to stock market highs. Selling out during down days or months can mean you’ll miss out on some of the market’s most profitable days. The S&P 500 total return index produced a 9.1% annualized return over the past two decades, but it wasn’t a smooth ride. The S&P 500 index skyrocketed 37.5% during 1995, but dropped 37% in 2008.
Dollar-cost averaging, or investing steadily by the month, even when stock prices are down, will ensure lower average share prices over time, which will bring you greater investment profits.
Manage risk with knowledge
Another maxim from the Oracle of Omaha holds that “risk comes from not knowing what you’re doing.” Successful investing calls for life-long learning and research, something that GuruFocus makes easier. A GuruFocus membership and GuruFocus videos on YouTube help investors get the information and expertise they need.
Diversify your asset allocation
Having a diversified portfolio will reduce risk since not every investment sector will have losses of the same magnitude at the same time. An easy way to get diversification is to invest in exchange-traded funds, since they can have tens or even hundreds of holdings. Shares of individual companies have more risk of loss, but their profits may not be as high as shares of an individual company. ETFs can include S&P 500 funds such as the Vanguard Total Stock Market ETF (VTI, Financial), bond funds such as the Vanguard Total Bond Market ETF (BND, Financial) or a myriad of others.
Stick to your value investing plans
Value investors are not day traders. They stick to their long-term investment plans and should not be swayed by a down day, month or year in the stock market. With that said, a down market can be a reason to rebalance your portfolio to keep it in line with your asset allocation plan. Generally, portfolios should be rebalanced annually if not quarterly.
Consider shifts away from riskier stocks
If you’re a value investor, you may not own any shares of growth stocks. Catherine Wood (Trades, Portfolio)’s ARK Innovation ETF (ARKK, Financial), which took a 56.7% dive over the past year, probably is not your cup of tea. During volatile times, owning shares of value stocks makes investing less risky since these stocks are from companies with solid financial footing that are making a profit.
Tech may be down from the highs of 2021 and earlier, but other sectors, such as energy and financials, are ones to consider. Stocks such as Chevron (CVX, Financial) are significantly up – in the case of Chevron, 24% in the past quarter. Financial stocks stand to benefit from rising interest rates.
