The last two years have been rough for FTSE 250 shares. Following the stock market correction in 2022, and continued economic uncertainty so far in 2023, the UK’s leading collection of growth stocks is down by almost a quarter.
By comparison, the FTSE 100 is actually up almost 5%, showing once again growth investors bearing the brunt of volatility. However, while most people are likely looking at their portfolios with distain, intelligent investors have pound signs in their eyes.
There’s no denying that watching a double-digit drop in wealth over 24 months is an unpleasant experience. But as with every significant downturn in the market, the emotional trap of loss aversion creates countless opportunities for investors focused on the long run. And while share prices have started to recover, there are still plenty of impressive businesses within the FTSE 250 trading at dirt cheap discounts.
Coping with volatility
Regardless of the investment strategy used, volatility is inevitable. The path to success is never straightforward and goes up and down like a yo-yo. And it’s ultimately what makes investing so challenging.
Yes, there is the prerequisite knowledge of knowing how to research and analyse stocks. But compared to staying in control of emotions after seeing an investment jump off a cliff is far harder and not something that can be taught.
When things start to go south, it’s natural to want to take action in an attempt to rectify the situation. But as backwards as it sounds, the best move is often to do nothing.
Volatility comes and goes like the wind. A disappointing earnings report may send shares of a FTSE 250 company into a tailspin. But if the underlying cause of the problem is only temporary, the stock will more than likely recover in the long run.
Of course, this doesn’t mean investors should just stick their heads in the sand. It’s critical to monitor what’s going on and how much exposure other companies within an investment portfolio have to a rising threat. For example, supply chain disruptions have been affecting far more than just one industry.
Investing in FTSE 250 shares in 2023
For many stocks in the UK’s flagship growth index, most problems plaguing operations are temporary. Rising interest rates are obviously disruptive, especially to over-leveraged firms. But businesses with robust balance sheets and resilient cash flows will more than likely adapt to the changing economic landscape. Some already have.
However, while this has created rare and lucrative buying opportunities for top-notch stocks, that doesn’t mean risk can be ignored. As with anything in the world of investing, nothing is risk-free. And since FTSE 250 shares are typically smaller enterprises with fewer resources, they are more exposed than titans within the FTSE 100.
This is why portfolio diversification remains paramount for success. Spreading risk across a collection of 15-20 companies operating in a range of industries and geographies reduces the impact of disruption within any single sector.
While it can’t eliminate risk entirely, combining diversification with picking undervalued enterprises is a proven strategy to try and achieve market-beating returns in the long run.
