Soaring inflation. Rising interest rates. The spectre of recessions. Right now, things seem bleak for investors like me and it’s tempting to avoid stocks for fear of losing hard-earned cash to the volatile whims of Mr Market. However, I believe there are great investment opportunities out there for me with an eventual stock market recovery in mind.
Here’s why I could look back on 2022 as a golden year for my portfolio.
How long will tough times last?
Some indexes internationally have hit bear market territory, although the FTSE 100 hasn’t. But the general trajectory has been downwards and nobody knows how long this will last. I can, however, use history as a useful guide for the future.
The high concentration of defensive shares in the Footsie, such as AstraZeneca and British American Tobacco, has helped keep London’s flagship index out of a bear market so far. But the S&P 500 is firmly in the red, posting its worst first-half return since 1970. There are various reasons for the poorer performance stateside, including a strong dollar and a larger tech sector.
Historically, a stock market recovery has always materialised on both sides of the Atlantic. Granted, in certain periods, such as the depression of the 1930s and the global financial crisis, it took a while, but share price movements alone are only half the story. For instance, at first glance, the Footsie has gone nowhere over five years, but this ignores dividends. A sensible dividend reinvestment strategy can have a huge compounding effect on my portfolio returns.
Stock markets are cyclical. Inflation, while high now, should come down if central banks succeed in taming the beast. Similarly, geopolitical events, like the war in Ukraine, are currently causing panic among traders, but they will also evolve. After all, stock markets worldwide eventually recovered post-WW2.
Time in the market
This leads me to two essential qualities in a great investor — patience and identifying good investment opportunities. The first requires a long-term mindset, focusing on future returns over years rather than tomorrow. The second requires insight and dedicated research (which is where a service like The Motley Fool UK’s Share Advisor can help).
For my own portfolio, I’m capitalising on the downturn in some of my key holdings. Lloyds shares are a good example. This FTSE 100 stock has underperformed the index in 2022. However, a combination of rising interest rates, a solid 4.75% dividend yield, and a low price-to-earnings ratio of 5.64, make me bullish.
The bank’s experiencing wage inflation, as shown by recent news that it will award £1,000 bonuses to over 64,000 staff to help them through the cost-of-living crisis. This could dent profit margins, but the longer-term benefits of high workforce morale outweigh this risk for me. With the Lloyds share price currently at 42p, I’m buying more.
In my view, heavy selling across countless shares makes now a great time for me to invest — before the stock market recovery.
So if I fast-forward in time with the stock market back to breaking all-time highs, it’s time for me to sell, right? Not so fast.
Bull markets tend to last much longer than bear markets. Holding stocks through good times and bad is my preferred strategy. I can’t imagine a time when I won’t own shares.