2022 was a disastrous year for many Stocks and Shares ISAs of growth investors, myself included. The rapid rise of interest rates to combat inflation triggered the end of near-free access to capital. And firms dependent on external financing are still feeling the pinch, causing stock prices to tank.
The situation has started improving somewhat. With the UK no longer on track to enter a recession and inflation dropping, consumer spending is slowly recovering. Subsequently, the FTSE 250 has climbed just over 10% in the last eight months.
While that’s still only halfway to triggering a new technical bull market, it’s an encouraging start to the long-awaited stock market recovery. So what’s the best course of action for growth investors trying to restore investment ISAs to their former glory? Let’s take a look.
Stay focused on the long term
As many investors have been recently reminded, stocks can be quite volatile. However, just because the market-cap of a business falls doesn’t mean it’s necessarily less valuable. Don’t forget in the short-term, share prices are driven almost entirely by investor sentiment. It’s only in the long run that they’re driven by underlying fundamentals.
That’s why it’s critical to dig a bit deeper when looking through all the red in a Stocks and Shares ISA. Is a stock falling because of a serious fundamental problem? Or are investors panicking about short-term issues that ultimately don’t matter in the long run?
If it’s the latter, then now might be an excellent time to top up positions. Providing an investment thesis is correct, the additional gains from new investment will accelerate the recovery process. And if the business continues to thrive thereafter, the long-term returns can become even more bombastic.
Review ISA exposure
In my Stocks and Shares ISA, I’m fairly concentrated in just a handful of sectors. This wasn’t always the case since my investment portfolio initially kicked off with a fairly even spread across multiple industries. But over the last decade, I’ve let my winners run, and it naturally started getting more concentrated.
Personally, I’m comfortable with this extra level of risk. But not all investors are the same. And for those with a weaker stomach for volatility, now might be an excellent time to review sector concentration. Apart from reducing over-exposure to a single industry in this stock market recovery, it also mitigates downside risk should the situation suddenly take a turn for the worse.
With stock prices still depressed, it’s likely a bad idea to start shifting existing capital from one firm to another. After all, this would entail selling low – a proven tactic to destroy wealth. Instead, investors capable of injecting further capital into their portfolio may benefit from allocating it specifically to existing or new positions to bring diversification back into balance.
