Last year was a difficult one for investors to stomach, as major indexes were down double-digit percentages. After several years of strong stock returns, this was a huge wake-up call. Consequently, investors might be scared to keep their capital in equities right now, or to even put new money to work. This is worrisome, as it can derail one's long-term financial goals.
But the S&P 500 and Nasdaq Composite indexes are up 8% and 15%, respectively, in 2023 (as of April 12). By starting the year on a positive note, investors are likely wondering if a new bull market is coming, which is technically a 20% rise from a recent low level. Hoping for stocks to go up is the natural way of thinking.
However, there's an even better question to ask: How does the market perform over longer periods of time? Let's take a closer look at why this is what investors should be thinking about.
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Stay focused on the long term
It's very easy to fixate on the daily, monthly, or quarterly gyrations of the stock market. After all, investors are bombarded with stock quotes and financial news constantly, making it difficult to ignore the noise. This is more so the case today, when it seems like every other day the headlines are filled with negative news, like a crypto company failing, or a bank run, or a recession on the horizon.
Despite all of this, investors should remain focused on the long term. The S&P 500, for example, which is considered the bellwether stock index that's most widely followed, has produced an average annual return of 10% (with dividends reinvested) since 1926. And think of everything that has happened in that nearly 100-year stretch. There have been wars, inflation, recessions, banking crises, a dot-com bust, a housing meltdown, and a global pandemic. Yet the market continues marching higher over time, albeit not in a perfectly straight line.
Maintaining this kind of thinking, that the ups and downs are a part of investing, is of the utmost importance today. Right now, the S&P 500 is still down 14% from its all-time high set in December 2021. And it can no doubt be a scary time to be an investor. But remember that the market will recover given enough time. And in fact, this could prove to be a great opportunity to be a buyer of stocks.
What you own matters, too
Keeping your sights set on the long term, which is at least five years out, is paramount to being a successful investor. But what investors own in their portfolios also matters tremendously. This topic is even more important today, when macroeconomic uncertainty, bolstered by high inflation and rising interest rates, is attracting all the attention.
To be clear, a bull market is coming. The big question is when exactly it will be. And nobody knows the answer with any level of precision, no matter how smart their predictions might sound.
This leaves investors with one simple course of action -- own the right businesses. I'm talking about companies with strong fundamentals, durable competitive advantages, and healthy balance sheets. Not only should these businesses be able to weather the storm that comes their way, but they should also thrive once the economy is on strong footing again.
The perfect example of an enterprise that fits this description is Home Depot (HD 0.94%). The leading home-improvement retailer has done a fantastic job over the years of growing its revenue and earnings at a solid clip. The company benefits from its massive scale, leading to an expanding operating margin, and sizable physical footprint, allowing it to be within 10 miles of 90% of the U.S. population. And Home Depot's ability to generate sustainable positive free cash flow in any macro environment should give investors confidence that it can successfully navigate the current slowdown it's facing.
While it's tempting to ask if a new bull market is coming, the better thing to do is remember that the market goes up over time. With this renewed perspective, it's up to you to properly position your portfolio.
