The correction we’re currently experiencing perfectly demonstrates the volatile nature of the stock market. Indices such as the FTSE 250, S&P 500, and Nasdaq have all fallen by 20%, 24%, and 27% respectively since the start of 2022.
And with inflation still climbing, along with a newly-announced quantitative tightening monetary policy in the US, there’s the possibility that prices will nosedive further. That’s probably why a lot of investors are being pretty fearful at the moment.
Personally, I’m not as pessimistic. We’ve been through periods of high inflation before and come out significantly stronger in the long run. Just look at where the FTSE 250 is today versus 1984 — around 18 times higher! That’s why I believe this situation, while unpleasant for now, looks like an excellent buying opportunity for my portfolio.
Understanding the opportunity
The predicament we face today is quite unique. The headlines largely focus on inflation and interest rates. However, these are being driven by a variety of factors, including supply chain disruptions, Chinese Covid-19 policies, labour shortages, semi-conductor manufacturing backlogs… the list goes on.
Sadly, none of these problems can be magically fixed overnight. But they’re not unsolvable. Over the long term, these issues will be resolved, allowing stocks of high-quality businesses to get back on track. After all, every other stock market correction and every crash in history has eventually ended opening the way for a long period of growth.
That’s why I believe this presents an incredible buying opportunity for my portfolio. And it’s quite a rare one. Despite what many believe, these situations really aren’t that common. We’ve only had four periods of significant rapid decline (including the current one) in the last two decades.
Leveraging the power of a stock market correction
Just because the stock market will eventually recover from the current correction doesn’t mean all stocks will. Every business is different. And there are some shares out there plummeting for a good reason.
Rising interest rates mean debt is about to get even more expensive. That obviously creates a pretty massive problem for overleveraged firms. Meanwhile, with lending activity getting stricter, seeking external investment will undoubtedly prove challenging. So any unprofitable, high-growth company may also be in for a rough ride if there isn’t enough cash on the balance sheet.
But for the companies not reliant on external funding, with strong cash flows, prudent management, and a wide competitive moat, I see only opportunity. In my experience, investing in fantastic businesses at double-digit discounts makes an enormous difference in my portfolio’s performance. And can massively accelerate the wealth-generating process.
The stock market may very well continue to fall from here, and potentially even crash. After all, no one knows when we’ll hit the bottom (we may have already). That’s why many investors see buying shares today as a risky move. But for my own portfolio, I believe not investing is the greater risk.