2022 has been a challenging year for long-term stock market investors like me. While the FTSE 100 index is up slightly for the year, other areas of the market have been crushed. Plenty of US growth stocks, for example, are down 30%, or more.
My own Stocks and Shares ISA – which contains a broad mix of UK and international stocks – has certainly taken a hit in 2022. Year to date, it’s down nearly 20%. So what am I doing now? Let’s see.
Focusing on the long term
One thing I’m certainly doing in this environment is taking a long-term view. History shows that, over the long term, the stock market tends to generate returns of around 7-10% per year. Yet the thing is stocks don’t move up in a straight line – they’re prone to regular pullbacks.
Right now, we’re experiencing one of those pullbacks due to the high level of economic uncertainty we’re facing (inflation, Russia/Ukraine conflict, supply chain disruptions, a possible recession, etc). So I’m going to zoom out and focus on the long term. In these kinds of situations, patience is key.
At the same time, I’m keeping my emotions in check. At the moment, we’re in a bear market environment – where a lot of stocks are trending down. The thing to understand about this kind of investment environment is that while there will be bad days, there will also be plenty of good days too.
We’ve seen this recently. After seven consecutive weeks of losses, the S&P 500 and Nasdaq indexes surged more than 5% in a week in late May.
I need to ensure that I don’t allow fear and greed to dominate my thinking here. If markets are falling, I want to remain calm and look for buying opportunities. Conversely, if markets are exploding to the upside, I don’t want to rush in and blow all my spare capital, as the rallies may be short-lived in the near term.
Buying at low prices
Of course, with many stocks down in double-digits in 2022, I am looking to take advantage of the lower share prices on offer.
When share prices were elevated last year and the year before, I put plenty of money into the market. In other words, I bought high. Now, I have the opportunity to buy low and average out my cost prices. Buying low should help improve my overall long-term returns from the stock market.
However, it’s worth pointing out that share prices could fall further. So I won’t be going all-in today. Instead, I’ll drip-feed money into the market every few weeks. This should help me average out my entry points.
Investing in good companies
As for where I’ll be investing my money, my strategy won’t really be any different to the one I’ve employed to pick stocks in the last few years.
I’ll be looking to invest in high-quality, Warren Buffett-style companies that:
- Have considerable long-term growth potential
- Are profitable and earn a high return on capital
- Have strong competitive advantages
- Have strong balance sheets
- Are trading at reasonable valuations
Examples of such companies include Microsoft, Diageo, Alphabet, and Nvidia.
I believe that, in the long run, these kinds of companies will boost my Stocks and Shares ISA (and my wealth) significantly.