Many investors are currently bearish on the near-term prospects for the stock market. They feel that the breadth and scale of challenges faced by the economy mean that an equity market decline is becoming increasingly inevitable.
For example, rising interest rates, high inflation and geopolitical risks are, in the views of many investors, likely to produce trading conditions that are more conducive to share price declines, rather than gains. Indeed, the Volatility Index has risen 24% in the past week. A higher figure indicates greater investor concern about the stock market’s future.
Action beats thought
However, making predictions about how the stock market may or may not perform over the coming months is of very limited use. As well as the obvious difficulties associated with predicting the future, taking action to ensure your portfolio is ready to cope with a potentially difficult period for the economy is of far greater importance than making estimates.
Indeed, an investor’s downbeat views about the prospects for a company could be proved correct, but their portfolio may still be severely negatively impacted by a falling market because they have not taken the necessary steps to protect its performance.
This viewpoint has previously been discussed by Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) Chairman Warren Buffett (Trades, Portfolio), who said, “Predicting rain doesn’t count. Building arks does.”
Simple steps in current market conditions
In my opinion, individuals who are downbeat about the stock market’s future should take the same steps as any other investor. Namely, they should ensure their portfolio holdings have the financial means to overcome a period of economic uncertainty.
For example, all holdings should have low debt levels so that they are not adversely impacted by rapidly rising interest rates. Investors may also wish to ensure their holdings have sufficiently wide economic moats so they may be less affected than sector peers by temporarily weak trading conditions.
Furthermore, holding part of a portfolio as cash could be a shrewd move at the present time. It may provide the means to capitalize on any future equity market falls by purchasing high-quality companies when they offer wider margins of safety than today.
A long-term recovery
Of course, predictions about the stock market’s short-term future should not cloud investors’ views regarding its long-term prospects. The S&P 500 has generated a double-digit total return on an annualized basis over the past 50 years. In that time, it has experienced numerous bear markets, corrections and declines, but has always recovered from them.
Therefore, investors should not become overly worried about the stock market’s prospects. By purchasing and holding strong companies with solid balance sheets and clear competitive advantages, they are likely to ride out even the toughest short-term economic outlook to benefit from a long-term recovery.
