The S&P 500 and the Nasdaq Composite ended 2022 down 19% and 33%, respectively, for the year. This was the worst performance for these two widely followed indexes since 2008, during the depths of the Great Financial Crisis.
Investors are probably wondering when the stock market will recover. This is a justifiable question, especially after many portfolios were in the red in 2022. But this is the wrong question to ask. Here’s a more important factor that investors should be thinking about right now.
Changing your perspective
Trying to predict when exactly the stock market will bounce back is impossible. Timing the market is a loser’s game, because it is not something anyone can do accurately with any level of consistency. There are an infinite number of variables that can affect stock prices in the short term, the most prominent being investor sentiment. If we can’t even predict how we will feel six or 12 months from now, how are we supposed to know how other market participants will feel?
I think a better question to ask is: “What’s my time horizon?” For investors who measure their investing lives in decades, what happens in a single year is hardly anything to lose sleep over.
To be fair, for those investors who are closer to or in retirement, having the market recover sooner rather than later is certainly a more pressing matter. But if people find themselves in this position, I wonder why they would’ve been invested so heavily in equities in the first place to make a down year like 2022 negatively affect them so much.
If you have a long-term mindset when it comes to investing, say a time horizon that spans over a decade, then the best course of action is to add to your portfolio on a monthly basis. Dollar-cost averaging, as it’s known, means buying stocks periodically no matter what market conditions are. Waiting for the market to recover won’t be a big concern for you, as you will continue to be a net buyer of stocks.
Image source: Getty Images.
Thinking about the Federal Reserve
I think it goes without saying that the Federal Reserve and its monetary policy have affected stock prices the most over the past several years. For most of the past decade, the Fed has instituted a loose and stimulative approach to boost the economy out of the 2008/2009 crisis, and most recently, the coronavirus pandemic. But in 2022, because of soaring inflation, the Fed started to hike interest rates aggressively, and this is set to continue in 2023. The result has been a downward spiral for stocks.
No one knows what the central bank is going to do next. And even though his words are closely scrutinized, Fed Chair Jerome Powell doesn’t even know what the next steps will be. The only constant with the economy is change. That’s why it’s best for individual investors to not even pay attention to these things, because all it can do is push you off your path of adding to your portfolio regularly.
Markets can go up and down in any given month, quarter, or year. That’s just the reality. Stock investors should know this fact before they purchase anything. But there is a bright spot. Over extended periods of time, markets go up, rewarding those with patience the most.
Therefore, it’s critical you stick to the plan, maintain a long-term mindset, and ignore the noise. These are all things within your control. And given enough time, you should be incredibly happy with your decisions.