US stocks continued to tumble last Friday (21 January), with the S&P 500 and Nasdaq posting their biggest weekly percentage drops since the start of the COVID-19 pandemic in March 2020. The S&P 500 is now down more than 8% from its record high in early January while the Nasdaq has officially entered correction territory with a 11% drop so far in 2022. (A market correction is traditionally identified as a drop of 10% or more from a recent high.)
What can you, as an investor, do when the market falls? Here are some tips to help you navigate the market sell-off.
What’s behind the Nasdaq correction
The Nasdaq has been the worst hit in this month’s stock market rout. As inflationary concerns mount, the Federal Reserve has signalled a more aggressive stance in taming inflation. 10-year Treasury yields hit as high as 1.9% last Wednesday amid speculation around the Fed’s timeline for unwinding its bond holdings and raising interest rates.
Rising yields have particularly affected tech and growth stocks – the main components of the Nasdaq. When interest rates are low, investors are willing to pay more for tech and growth companies on the assumption that earnings will be higher in the future. But higher rates lower the present value of these future cash flows, and make valuations look less attractive now.
Tech and growth companies are more sensitive to interest rates since they rely on future cash flow growth. With the market now expecting four rate hikes this year, sentiment has turned bearish.
Netflix’s disappointing fourth-quarter earnings report was yet another catalyst for Nasdaq’s slide. Shares of the company fell 21.8% last Friday, pushing the Nasdaq further into correction territory.
Sell-offs are normal
Although the current sell-off may feel nerve-wracking, market corrections are not as rare as you think. From time to time, it’s normal that stock prices will experience pullbacks due to negative economic developments, political shocks, disappointing corporate earnings reports, or other factors that affect investor sentiment.
The recent Nasdaq correction is its 66th since its launch in 1971. This means that a correction happens around 1.3 times each year on average.
But what’s important is that stock prices don’t stay down after a correction. Historically, Nasdaq returns turn positive three months after it enters correction territory. Since 1971, the Nasdaq has risen 15% on average one year after bottoming.
For long-term investors, the takeaway is that market pullbacks or corrections are a normal part of resetting stock valuations and investor expectations. Staying invested through periods of volatility is key to investment success.
For long-term investors, the recent sell-off may even be an opportunity to add selective exposures to your portfolios.
Reframe the correction as an opportunity
With many tech and growth stocks coming off from their recent highs, now could be a chance to invest in high-quality assets at more attractive prices – before they continue their upwards trajectory once again.
There’s a famous expression from the legendary Warren Buffet that says: “Be greedy when others are fearful, and fearful when others are greedy”. As other investors flee, his mantra suggests that a market decline could be a good time to cash in on lower equity prices.
As to what opportunities are available, consider long-term fundamentals. Tech stocks may not be in favour now, but think about the strong balance sheets and sustained growth potential of companies such as Apple, Microsoft, and Amazon. If you believe that over the next three to five years, such companies will continue to outperform, then short-term sell-offs may be an opportunity to buy quality investments at a discount.
Consider dollar cost averaging (DCA)
In a volatile market, it can be difficult to stick to your regular investment plan. One effective strategy to help you overcome your emotions is dollar cost averaging (DCA). By investing a consistent sum regularly – regardless of current market conditions – you eliminate the temptation to second-guess your investment strategy, or time the market.
This strategy can be as simple as investing say $1,000 every month in your Syfe Wealth portfolio. By investing at regular intervals, you can capitalise on lower prices now while avoiding the risk of buying all at once ahead of another market drop.