Weathering the Storms of the Stock Markets (Part 3)
When buying stock in a bear market, some investors choose the methodology of legendary investor Warren Buffett, "value investing," which entails choosing stocks based on the underlying company’s operational quality and ability to generate solid earnings over time. These company stocks make good long-term holds and will likely still have stable earnings 10 or 20 years down the road.
Investors must separate the stock price from the underlying business, as they often have very little to do with each other over the short-term. Even if the market doesn't currently recognize a company's worth and undervalues its stock, if the company continues to make money as an operating business with solid financials and other characteristics, this says more about the intrinsic value, or essential nature of the company, than that reflected in its current share price.
Additionally, for an investor who typically invests long-term with the intent to hold your shares for decades, a bear market creates a great opportunity to accelerate your returns over longer periods despite seeming counterintuitive. With lowered stock prices, making fixed periodic investments over time in stock, can bring down the average cost of your holdings and shorten your portfolio's recovery period once the bear market eases up. This way, you'll end up buying more shares when the price is down and fewer shares when the price moves up.
All in all, a balanced portfolio is the safest strategy to counter market shocks. A healthy mix of value accretive shares, income-generating holdings, new listings (IPOs), and non-cyclical stocks are likely to grow your portfolio when times are good and keep it well-padded when times are tough.
Additionally, if you own dividend-paying stocks, reinvesting those dividends acts as a "return accelerator." The reinvested dividends reduce the cost basis of your portfolio as a whole. To be continued