Stock market corrections are an unavoidable reality on an investment journey. Regardless of how well-diversified a portfolio is, prolonged periods of negative sentiment will eventually come along and throw a spanner in the works.
Investors enduring the current stock market turmoil since late 2021 know this all too well. But as unpleasant as these periods of downward volatility can be, they’re actually pretty rare. In fact, 2022 was the worst-performing year for the stock market since the 2008 financial crisis over a decade ago.
Yet, as history has shown countless times, this also makes it potentially one of the best years to start buying shares. And since the markets have yet to fully recover, 2023 could be an extension of this once-in-a-decade chance to bolster an investment portfolio for the long run.
Capitalising on buying opportunities
When pessimism is on the rise, panicking investors make dumb decisions. In an attempt to mitigate losses, those who succumb to their emotions often end up selling off terrific stocks at terrible prices. That’s why corrections become breeding grounds for opportunity.
Snatching up top-notch stocks at a discount and waiting for the markets to calm down and recover is a proven strategy to build wealth. However, it’s not as simple as just hunting for the biggest short-term losers.
Investors need to carefully scrutinise each company before considering them as a potential addition to a portfolio. During volatility, it’s easy to assume a downward trajectory is being triggered by panicking investors. But in some instances, this fear could be well justified.
After all, the changing macroeconomic landscape could have a significant material impact on the viability of a company. This may even include ones that have historically been stellar performers. And the last thing any investor wants is to buy into what looked like an opportunity but was, in reality, a value trap.
Finding the best bargains
Under normal conditions, the best buying opportunities within the stock market are usually in sectors or companies that are out of favour. Why? Because fewer investors are searching in these regions. So, there are greater odds of discovering terrific deals that others haven’t stumbled upon yet.
This principle doesn’t change during a correction. Looking at UK shares today, those that have recovered the most so far are unsurprisingly some of the most popular. But chances are, these won’t be the stocks that drive the biggest market-beating returns in the long run.
That’s why I’m exploring the industries many believe to be poor investments right now. One example of this in 2023 would be commercial real estate. With so much uncertainty regarding rising interest rates, the property sector is on track to continue contracting well into 2024. And consequently, REITs aren’t at the top of everyone’s wish list.
There are some valid concerns surrounding this sector. But in many cases, they appear to only be short-term hurdles rather than groundbreaking catastrophes. And for the property managers who are well capitalised with chunky cash flows to absorb high mortgage costs, terrific buying opportunities may be hiding in plain sight.
