Many investors who got into investing over the past few years of a bull market were blindsided in 2022, having never experienced falling prices. It's a good lesson in investing for the long term. People on the fence might be scared off from getting started, but getting in right now can give you an edge in understanding valuations and choosing great companies instead of chasing growth stocks.
One month into the new year, there's some tentative enthusiasm as many stocks are beginning to climb back up. If you're looking to get started, this is the perfect time.
Image source: Getty Images.
Investor sentiment is tempered
Many newer investors are still reeling from the bear market, having seen their portfolios lose a tremendous amount of value. Investors who embrace a growth investing mindset might have seen a worse outcome than those that lean toward value investing, but the entire market was down for the year. Warren Buffett, whose value investing approach is legendary, posted a small gain of about 4% in 2022 for his holding company Berkshire Hathaway, which outperforms the broader market the majority of the time.
Investors moved their money into value stocks last year at high rates as part of the "flight to safety." There are a few reasons for this. First of all, when there's inflation, people spend less and company costs increase. That puts pressure on many companies, which then post disappointing operating results. However, there are resilient companies that feel a softer impact. That's where investors put their money last year.
Next, rising interest rates pose a threat to a company's ability to borrow money and pay down debt. That makes its stock less appealing. Established companies that post slow growth but have fortress balance sheets become more attractive under these conditions.
Finally, when stock prices go down, investors can still collect income from dividend stocks. Many dividend stocks are also safe stocks.
That doesn't mean it makes sense to sell all of your growth stocks in a bad economy, or even a down market. If investors have a long-term mindset, a long enough time horizon, and confidence in a company's potential, it's usually worthwhile to hang on.
Even if the economy shows improvement or investors begin to have more confidence in the market, seeing the importance of a diversified portfolio firsthand gives you an edge in long-term investing.
Prices are still down
A bear market also provides compelling entry points for new investors. Highly valued stocks could appear daunting to newbies, or to anyone really, because they generally come with a substantial amount of risk. Lower prices also provide great opportunities for gains.
When considering price, it's important to keep in mind that you can't time the market. While a loss in value does provide some opportunity, if you're confident about the company's future, the stock's prior historical moves shouldn't be a strong determinant in your decision. If anything, the sooner you get started, the greater your chance of making the most of your investment. Adding funds consistently when they are available (after paying down debt and setting aside an emergency fund) also helps your nest egg grow.
Although the S&P 500 is down over the past year, a $10,000 investment 10 years ago would be worth a lot more today, and an investment in Berkshire Hathaway even more.
Notice several dips along the way. Investors who panic-sold missed out on some great returns.
If you've been on the fence until now, don't let the bear market scare you off. See it for the opportunity it presents.
Holding for the long haul
The market performs in unpredictable cycles. But there are patterns that are likely to continue into the future. There are going to be bear markets, and there are going to be bull markets. If you hold through the tough times, you should be grandly rewarded. Keep your expectations in check and hold a mix of growth and value stocks that provide different benefits at different times.
