Investors have had a rough go of it in 2022. All three major indices are in a bear market, which is a drawdown of at least 20% from the high. However, many well-known individual stocks are down far more.
Out of the 10 largest stocks by market cap in the Nasdaq Composite, seven are down over 30% from their all-time high, and two are down over 60%. Many growth stocks are down over 80% from their highs.
Investing is easy when most stocks seem only to go up. But when an investment portfolio is down big, it can be challenging to stay even-keeled and focus on the long term. You can’t wave a magic wand and wish a stock to go up. But you can take actionable steps to position your portfolio to outlast a prolonged bear market. Here are three steps worth considering now.
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Revisiting your holdings is a good practice, no matter the market cycle. But the exercise can be taken a step further in a bear market. Outlasting volatility becomes a little easier if you remember why you bought a company in the first place.
For most quality businesses, the investment thesis probably hasn’t changed between a year ago and today. Granted, margins may be under pressure, earnings may be declining, and growth rates may be slowing. But businesses don’t experience linear growth. Rather, ebbs and flows are simply par for the course.
A good example of a company whose business remains largely the same is Google parent company Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). Due to its dependence on advertising revenue and a strong economy, Alphabet’s business is facing short-term headwinds. However, the investment thesis for Alphabet hasn’t changed at all. Alphabet stock may be down 35% from its all-time high — around the same as the Nasdaq Composite. But that doesn’t mean that Alphabet, as a company, is in trouble.
The same can’t be said for companies that aren’t free-cash-flow positive, are unprofitable, are losing their competitive advantages to larger companies, or depend on debt or equity financing to stay afloat. Rising interest rates and a challenging business climate are headwinds for most companies. But for some, they could lead to unsustainable cash burn and a reason to reconsider owning the company.
Over time, dollar-cost averaging into your favorite companies has been a tried-and-true method for compounding wealth. Saving more can be a great way to accumulate additional shares of your favorite companies, especially when they are on sale.
Saving more money isn’t easy. But purposeful saving can be achieved by making a list of companies to buy every two weeks, month, or whatever increment of time is best for you.
Bear markets have historically been excellent times to add shares. The problem for most investors is that they don’t have cash on the sidelines to buy stocks on the cheap. However, investors who are still in the asset accumulation stage of their lives — as in they make more money than they spend — are at an advantage because they can put more money to work and likely have that capital go even further.
No one likes losing money. But an even worse feeling is losing money in an unexpected way by owning companies that don’t fit your personal risk tolerance or investment time horizon.
Investors that are in the asset accumulation stage of their lives can afford to take more risks by letting an investment thesis play out and outlast the volatility. However, investors in the asset distribution stage of their life are spending more than they are making and therefore tend to be more risk averse.
If you are a retiree with high-risk, high-reward stocks that could lead to missing your financial goals, it may be time to rethink some positions. The same disconnect between financial goals and investment holdings can occur if an investor winds up owning too many stodgy companies when they don’t mind taking on more risk when asset values are lower.
In a bear market, it’s important to remember that investing isn’t about beating the market. It’s about reaching your financial goals in a way that is comfortable, lets you sleep at night, and is aligned with your risk tolerance. In a bull market, it’s easy to be complacent. But bear markets have a habit of catching investors off-guard. For investors whose portfolios are already mostly in line with what they want to own, the best course of action may be to simply do nothing at all.
It’s human nature to want to do something, anything, to rectify steep losses. But often, heavily trading through a bear market can do more harm than good. By taking action through a portfolio checkup, updating your savings plan, and bridging the gap between your holdings and your financial goals, an investor can feel a sense of empowerment even if their screen continues to be painted red with falling stock prices.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Foelber has positions in Alphabet (A shares). The Motley Fool has positions in and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.
