Share prices continue to tumble and this can, understandably, create nail-biting moments for some investors.
The S&P 500 Index has fallen by 17.7% year-to-date while the tech-heavy Nasdaq Composite Index is down by 27% so far this year.
This means that the Nasdaq is already deep in a bear market while the S&P 500 Index is inching towards that level as well.
With the market at its current level, is it a strong buying opportunity or a value trap that will lead investors to lose more further down the line?
The answer depends on your investment time horizon, cash flow and risk tolerance. You may read more about how to get started here.
Unless we fall into a recession for a long period of time, I believe the stock market will rebound and deliver positive returns over an extended time frame.
Where does the stock market go from here?
Truth be told, you can tell that I don’t have a certain answer for you because if I were to have a crystal ball, I would be sipping my champagne on a superyacht instead of writing this article.
However, it is fair to expect to see volatility remain for most of 2022 and there could be more selling pressure in the stock market.
This is as most of the factors that have pushed the stock market lower are still in play. Interest rates are still rising and more central banks are joining the monetary policy tightening bandwagon.
The geopolitical risk remains with the ongoing Russia-Ukraine war while the stagflation risk remains on the cards.
Basically, the three risks that I mentioned at the beginning of the year are still present and we’re still not out of the woods with the COVID-19 pandemic.
Stock market valuation not at a depressed level
Despite the negative sentiment, stock valuations are still fairly valued and have not fallen to a depressing level that warrants a “must-buy” call.
If valuations were to fall to historically low levels, it would be a no-brainer to take on excessive risk but we have not seen it at the moment.
With so much downside risks and uncertainty on the global macroeconomic front, it is hard to see a quick rebound in the stock market.
Use options to invest in the near-term…
It is natural to feel the need to pull out from the stock market amid the bear market but if fear prompts you to sell stocks, you could miss out on the upside potential.
Over the last week, while I was on holiday in Singapore, a few of my friends texted me on how to navigate the stock market volatility.
The easy answer is “do nothing” and focus on the long-term potential of the company you are buying into. I think my colleague Tim wrote a very good article last week on this.
However, if you can’t stomach the downside in your portfolio, one of the ways is to use options to hedge the short-term risks.
A good strategy is to sell or short call options on a security or stocks that you are buying into.
Or continue to think long term
Honestly, long-term investors shouldn’t be too concerned about the stock market performance over the next six months.
History shows that a diversified basket of stocks is nearly certain to generate a positive return over a 10-year period.
If your goal is to achieve a diversified long-term investment portfolio that generates a sustainable return, your focus should be on the company’s financial performance, its competitive advantage, balance sheet and management transparency.
In fact, I think the market weakness offers an opportunity for investors to gradually build up their portfolio.
This can consist of buying companies that have a strong track record and generate value for both their shareholders and customers.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
