Although the S&P 500 experiences a correction of 5% about every 13 months and a drop of 10% about every 19 months (on average), investors still get spooked any time that it actually happens. This is because there are probably numerous other negative headlines at the time that have our attention and cause worry.
The broader index is down 7% so far in 2022, which is not frightening by itself. But add in rising inflation, interest rate hikes, supply-chain challenges, and geopolitical turmoil, and the situation is full of uncertainty that could have investors questioning whether they should sell their stocks.
In times like these, it's worthwhile to have the right mindset when it comes to your portfolio. Keeping a level head and not panicking could pay off over the long term.
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Investors should focus on the fundamentals
Warren Buffett, the legendary investor and head of conglomerate Berkshire Hathaway, recently released his company's annual shareholder letter in which he emphasized that he and his longtime business partner, Charlie Munger, are not stock pickers, but rather business pickers. Adopting this mentality is absolutely crucial to surviving a market crash.
Instead of being fixated on the day-to-day gyrations of stock prices, we should have our attention on the underlying fundamentals of the companies we own. Home Depot (HD 0.94%), for example, is down 21% (as of March 21) in 2022, but the business is performing extremely well right now.
Revenue and diluted earnings per share in the most recent quarter (ended Jan. 30) jumped 10.7% and 21.1%, respectively, compared to the prior-year period. And this is on top of extremely difficult comparisons in the fiscal 2020 fourth quarter. What's more, Home Depot's same-store sales, an important metric for any retail business, increased 11.4% in fiscal 2021.
The company continues to lean on its technological capabilities to serve both its DIY and professional customers. In the last fiscal year, digital sales were up 100% on a two-year basis. Although growth should slow this year, Home Depot will keep benefiting from the robust housing market and consumers' propensity to take on renovation projects.
Looking at Home Depot's stock performance in 2022 might make investors want to sell the stock and move on. Key data points that we should have our eyes on, such as the ones I just mentioned, indicate that we should take advantage of the current situation and buy more shares in the business.
Understanding and focusing on the underlying fundamentals of your portfolio holdings, maintaining a long-term mindset, and realizing that market crashes are normal will help during times like these.
Volatility is the price of achieving outstanding returns
Investors should not put any money in the stock market that they'll need within the next five years. That's because the stock market is inherently unpredictable in the short term, driven entirely by mood and sentiment at any given time. However, over longer periods of time, the performance of the underlying companies in our portfolios is what drives returns.
Having a long-term approach allows investors to stay the course and not sell should markets take a turn for the worse, which we know happens often. Volatility is just a part of the game, and we must be able to stomach the inevitable ups and downs in order to achieve market-beating returns over time.
I know it's not an easy task, but ignoring what stock prices are doing, and instead keeping an eye on metrics like user growth, sales, net income, and cash flow will make it easier to handle market turmoil. And I'm positive that this mentality will ultimately make you a better investor.
