- Investors trying to figure out whether they should sell everything now can consider to sell half to cut losses and hold on to the other half in case markets rebound suddenly.
- There has been a greater portfolio concentration than at any time in the past towards high growth tech sectors, investors may want to reconsider pouring into “new” profit centers such as energy, but rather take the opportunity to create a diversified portfolio.
Investors had been skirting around the possibility for some time now – a bear market.
Most refused to believe that the U.S. Federal Reserve would allow stocks to tank, and most, as in all other cases in history, were wrong.
With U.S. inflation burning white hot, pressure is rising on the Fed to ratchet up rates to the point of recession, come what may, costs must come down.
Assurances that the Fed would hike by just 50-basis-points on Wednesday, have been replaced by fears that the rate hike will be closer to 75-basis points.
These fears of course are fair, the Fed will have to get more aggressive, but it won’t likely be this Wednesday.
Nevertheless, stocks are officially in a bear market, defined as a close of at least 20% below its peak.
The tech stocks which powered the pandemic-driven rally have fallen harder than the benchmark S&P 500, with Meta Platforms (-0.32%) down more than 50%, Amazon (-1.31%) losing 39% and Microsoft (+0.92%), Apple (+0.67%) and Alphabet (+0.30%) all losing about a quarter of their value.
Meanwhile, the growth stock benchmark Nasdaq Composite Index has been in a bear market since March and is down about a third from its high last year.
But to put things in perspective, an S&P 500 index fund has still returned, with dividends, almost 70% over the past five years.
The reason most investors don’t think in these terms is because we are all emotional creatures, who feel losses far more intensely than gains.
In bear markets, it may feel hopeless, but the best response may be to stick with a plan for steadily investing in a diversified portfolio, to benefit from dollar cost averaging at least methodically.
Over the past several years, more investors than ever had most of their pot riding on tech stocks, and even after the recent correction, the top five tech-driven stocks on the S&P 500 still make up more than a fifth of the market capitalization-weighted index.
Many investors doubled down on technology and as such are nursing losses far more than a diversified portfolio.
But investors may not want to aggressively sell tech stocks now yet could consider making them less dominant in a portfolio down the line.
Similarly, sectors that are flying high now, driven by the supply shock created by the end of pandemic lockdowns and Russia’s war on Ukraine, such as energy stocks on the S&P 500, which have returned more than 50% this year, bear close monitoring.
Instead of making binary decisions, sell all or nothing, investors could consider making half-sized bets, sell half, so if the stock falls further you took some money off the table, but if it rebounds, you still have the half in hand – either way, your brain will clock it as a win.
And what about retreating into cash entirely? Stuff it into a mattress and hope for a better day.
The problem with that is it’s difficult to time the markets, even for professionals and even harder to guess when markets will turn.
Being caught on the sidelines means that investors who hold on to cash will miss the largest and strongest leg up.
