It is easy for investors to lose focus at the present time. The economy and stock market are experiencing an extremely uncertain period where risks such as high inflation, rising interest rates and geopolitical challenges in Europe have the potential to negatively impact asset prices.
As a result, many long-term investors may become increasingly short-termist – especially since the stock market is currently down 21% year-to-date. They may become increasingly concerned about the near-term outlook for their portfolios amid disappointing stock price performances that equate to substantial paper losses.
A long-term focus
In my view, it is imperative that long-term investors maintain their focus on the coming years rather than the near-term months. After all, their investment goals are long-term in nature, such as investing for retirement, and are unlikely to be permanently affected by short-term uncertainty that proves to be temporary.
This point has previously been highlighted by Peter Lynch, who generated a 29% annualized return while managing the Magellan Fund between 1977 and 1990. During that time, he experienced two bear markets that, combined, lasted for in excess of two years. As he once said, “You have to keep your priorities straight if you plan to do well in stocks.”
Short-term opportunities
In fact, long-term investors can use temporary stock market mispricings prompted by economic uncertainty to look into undervalued stocks that offer attractive long-term capital growth potential. This could strengthen their portfolios' prospects over the coming years and increase the chances of them achieving their long-term goals.
Of course, it is also important for investors to acknowledge the presence of short-term threats to their holdings. As a result, it is crucial to ensure that all portfolio holdings have the financial strength to survive a period of economic weakness so they can capitalize on a likely long-term recovery. In fact, sound companies with wide economic moats may be able to use weak operating conditions to strengthen their market position relative to sector peers.
A constant reminder
Clearly, it can be difficult to remain focused on the long run when the stock market is falling and the economic outlook is deteriorating. In my opinion, history can help to assuage investor fears surrounding the near-term outlook. Despite experiencing numerous bear markets prior to the current one, the S&P 500 has produced double-digit annualized total returns since the Wall Street Crash in 1929. Therefore, its decline since the start of the year does not look insurmountable by any means.
How long it takes for a brighter economic and equity market outlook to emerge is a known unknown. Investors who can remain focused on their priorities and goals, and use short-term market movements and negative news flow to their advantage, are most likely to benefit over the long run.
