The stock market has had some horrible years throughout its history, and 2022 was shaping up to be among the worst for the S&P 500 (^GSPC -0.27%) until bouncing off its lows over the past few months. It's still down 17% year to date, and investors are now closing the book on this year and preparing for a fresh start in 2023.
However, many factors affecting the market this year -- inflation, rising rates, an ongoing war, and possible recession among them -- are all still casting shadows over Wall Street. So can one beat the S&P 500 in 2023? Of course! But nobody can predict what will happen in the short term. Sorry, I can't promise anything. Still, you could maximize your chances by following this playbook.
Distinguish broken stocks from quality businesses
The market can act like a tide that raises and lowers all ships, especially in extreme situations. For example, you saw everything go to the moon throughout 2021, and now, everything outside of oil stocks has seemingly been vaporized. Life can come at you fast on Wall Street. But that's OK; the technology companies, growth stocks, and other beaten-down assets will again have their time in the sun.
But knowing the difference between a genuinely excellent business with a broken share price and a questionable company that got inflated in a euphoric market bubble could dictate your 2023 investment returns. Look at shares of Meta Platforms and Skillz in the following chart. Both have been crushed this year, severely underperforming the S&P 500.
I wouldn't blame anyone for assuming both companies are on the verge of failure, given the performance of each stock. However, Meta brings in billions in revenue and has billions in positive free cash flow to go with it. Meanwhile, Skillz is burning almost as much cash as it brings on the top line. It's pretty clear to me which company's stock decline makes more sense.
META Free Cash Flow data by YCharts
Not all stock declines are created equal. Such is life in a bear market. Fill your portfolio with stocks of companies that are growing and making money and have strong balance sheets (that is, lots of cash and little to no debt). They're most likely to survive the hard times and eventually recover to new highs.
Don't jump with two feet
I can sit here confidently and tell you that I'm pretty optimistic that quality stocks with solid fundamentals will come out of this bear market smelling like roses. However, trying to time that rebound is anybody's guess. The market will often zig when you think it will zag, so don't try to get cute by pushing in all your chips when you think things are just about to turn for the better.
Adopt a dollar-cost averaging strategy when you slowly build investments by buying a little bit at a time if you start buying at the market's bottom, which you won't know until after the fact. Do that, and you'll ride the market's recovery back up. But if you're wrong and the dip keeps dipping, that's fine; you'll average down your cost basis on the drop. It's a strategy that protects you from the worst-case scenario of going all in at the wrong time.
I'm with you, hoping the market does much better in 2023 than it did in 2022, but you can't know if it will. That's why having a plan is essential. Don't let emotions rush you; target the stocks you want in your portfolio, and slowly build your positions.
Beating the S&P 500, summed up
It's time to tie all this into an actionable investment strategy.
Remember to build a diverse portfolio. You don't need to own hundreds of stocks, but you should never put all of your eggs into one or two baskets. Aim for at least 25 positions over time, which can be stocks or index funds. Make sure you're buying stocks of companies with solid businesses and robust financials, what you might call strong fundamentals. Here are three intriguing growth stocks to consider.
Finally, take a long-term approach. A year feels like a long time, but investments often play out over the years and sometimes decades. The markets will go up and down, but the cream typically rises to the top if you wait long enough. Follow these tips to put your portfolio in the best position possible to build wealth over the years ahead.
