This year hasn't been a particularly positive one for the stock market, with the S&P 500 down 16% in 2022, despite climbing 11% since the start of October. After posting two years of great returns in 2020 and 2021, the market might just be taking a needed breather.
But the Federal Reserve, which is tasked with keeping unemployment low and prices stable, is partly to blame for the market's performance this year. Rising interest rates have made riskier assets, like growth tech stocks, unattractive. What's more, many are preparing for a possible recession, and in this scenario, why own stocks? Maybe it's best just to wait until the dust clears.
Predicting the market bottom might be tempting, but it's a virtually impossible task. Don't worry. You can still be a successful investor without being a market timer.
Ignore the forecasts
The world has no shortage of so-called financial experts who shout their predictions on TV any chance they get. Whether trying to forecast when inflation will peak or what the central bank is going to do next, these people are never short on opinions.
One thing is certain -- accurately making a short-term forecast is impossible to do consistently, if at all. There are an infinite number of variables affecting the economy and markets, and there is no way anyone can figure out what's going to happen next.
To hammer home this point, let's say that you were prescient enough to predict that a pandemic was going to bring the global economy to a screeching halt in the spring of 2020. What would you have done with this information? You most likely would have sold your entire portfolio and held cash for however long it took until the situation returned to normal. This would've been the wrong course of action, as the S&P 500 increased more than 18% in 2020.
You need to know not only what is going to happen, but also the market's reaction to it. Good luck.
With all the corporate layoffs happening and businesses reporting slowing growth in the most recent quarter, investors might want to wait on the sidelines until things show signs of improvement. But by then, stock prices might already be on their way up.
Focus on the long term
The cure for trying to time the market, hopping in and out of positions based on silly forecasts, is simply to find high-quality businesses and plan to hold them for the long term. Investing in the stock market successfully requires a long-term mindset and being mentally prepared for volatility. While it's definitely challenging to ignore the noise out there, this investing strategy really is that simple.
NYSE: NKE
Key Data Points
A company that investors should look at right now is Nike (NKE 1.35%), whose stock is down 37% in 2022. The business has a long and successful history of increasing revenue and net income at a solid clip. It's one of the most recognized consumer brands in the world, and this status adds durable relevance to the business, a trait most companies wish they had. And Nike still has lots of growth potential, and it's steadily gaining share in the global sportswear market, which is valued at close to $400 billion.
Nike's stock is up over 350% in the past decade, so for patient investors who can concentrate on the next 10 years, as opposed to the current quarter like most market followers, solid returns are certainly within reach.
Because the market is unpredictable, it's a good idea to dollar-cost average into your holdings, buying a small amount periodically, say every month or so. This ensures that you do not have to correctly time the market and instead can benefit from buying at different prices. Plus, if you plan on being a holder for a long time, trying to time a low point will hardly matter in the grand scheme of things.
Investors don't have to guess when the market will bottom out. Let others try (and fail) at doing that. You can focus all your efforts on creating a well-diversified portfolio that should do well no matter what happens in the near term.
