The stock market’s 24% fall since the start of the year means many companies now offer wider margins of safety than they did previously. This could improve their investment appeal on a long-term view.
However, some investors may be waiting for stocks to fall to even more appealing levels before buying them. They may feel that risks such as rising inflation and increasing interest rates have not yet fully played out in terms of their impact on the economy’s performance and investor sentiment. As such, they could believe there are better opportunities ahead to buy undervalued shares.
Unpredictable short-term performance
This is an arguably very risky strategy. After all, it is impossible to determine how the stock market will perform over the short run. For example, even if the economy’s performance deteriorates based on factors such as high inflation and rising interest rates, share price declines since the start of the year may already reflect a worsening operating environment. This could mean the stock market fails to decline to a lower level.
Furthermore, unknown catalysts that cannot be predicted ahead of time could push the stock market significantly higher. For instance, inflation may moderate from its current level, while the Federal Reserve may take a less hawkish stance on monetary policy. These, and an infinite number of other unknown events, could have a major impact on share prices over the short run.
Grabbing today’s buying opportunities
Indeed, with the stock market having an excellent track record of recovery from its worst bear markets, I believe buying shares when they offer fair value for money is a logical approach. Trying to time the market too perfectly can easily backfire for investors.
This viewpoint has previously been discussed by Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio), who said, “Don’t pass up something that’s attractive today because you think you will find something better tomorrow.”
Taking a long-term view
Rather than trying to time the stock market, I believe it is more logical to take a long-term view. Even if an investor is unable to find the very bottom of the current bear market, which is a nearly impossible task, they are still likely to benefit from purchasing stocks at below their intrinsic value. And with the stock market having delivered an annualized double-digit total return over recent decades, they are likely to generate attractive returns in the coming years.
Of course, it remains unclear which industries will recover quickest from current economic challenges. Therefore, it is prudent to maintain a disciplined approach to managing a portfolio. Diversification, ensuring all holdings have sound financial positions and reinvesting dividends where possible can further enhance overall returns as the current bear market transitions into a bull run.
