Is this the beginning of a 30-60% decline in the stock market? A correction to blow off a little of the excess in the valuations of growth stocks that’s almost over? Something in between?
Nobody knows, and it would be silly to spend too much time guessing. We should be prepared for either — which means I shouldn’t sell everything, but neither should I buy everything that dropped… I should lighten up on positions that are or were soaring based on investor sentiment and momentum, particularly if they’ve broken down enough to trigger a stop loss, and I should add to high-conviction positions that are getting washed out for no particular reason.
And, of course, regardless of what I think about where the market is going in the next six weeks or six months, I should keep investing a bit each month to build my portfolio, looking for companies that I think are likely to grow in value and compound their earnings over the next 20 years. But, of course, it’s easy to panic or overreact when the market has big swings like this — particularly when we’ve had such a quiet market for so long that we’ve forgotten when 5-10% market drops feel like.
There’s no reason to panic, and though stocks have freaked everyone out this week it’s also no reason to suddenly go “all in,” either… now is the time for making small moves, I think, and remembering that if you buy or sell a position over a long period of time not every single transaction has to be at a price you can brag about to your friends.
The market is still trading at historically very high valuations, interest rates are probably still rising, inflation will probably sneak back in when we least expect it, so, I tell myself, it’s important that I be boring and moderate and continue doing my selling and buying on the margins, without slashing away at that portfolio I’ll depend on to provide my retirement income in 20 years or making big “this is the bottom!” bets.
It’s very hard to guess when sentiment will shift, but it’s important to keep an eye on what matters for individual companies, and what kind of “foundation” the business might have that can support the stock price during a weak market, or give some assurance that it will recover for ...