The year 2022 has barely begun and already the U.S. stock market is performing differently than it did in 2021 or 2020. At the close on 19. January, the exchange-traded Vanguard Value ETF (WKN:A2PKXGV) was down less than 1%, while the S&P 500 was down nearly 5% and the Vanguard Growth ETF (WKN:A0MK1G) fell by over 9%.
For now at least, value stocks appear to be replacing growth stocks as the new group with the best market performance. To illustrate how rare this is, consider that value stocks have outperformed growth stocks in only two of the last 13 years.
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Let’s find out if now is a good time to shift from growth to substance values.
1. Find out what kind of investor you want to be
Buying into what works in the stock market in the short term is a bad idea. The last few years have clearly shown this.
In 2020, hyper-growth stocks, many of which are unprofitable companies, drove the stock market to new heights. Solar and wind energy stocks have also tanked the market, while oil and gas stocks have had one of the worst years in history (compared to the S&P 500).
The three sectors of the S&P 500 that were the worst performers in 2020- Energy, real estate and financial values- were the three sectors with the best performance in 2021. Conversely, many growth stocks in the style of Cathie Wood fell over 40% in 2021. Solar and energy stocks significantly underperformed oil and gas stocks last year.
The lesson here is not only that the market can be irrational in the short term, but also that sticking with investments you like often pays off in the end. Those who sold oil and gas stocks in 2020 to buy high-growth stocks in 2021 probably regretted it.
If you figure out what type of investor you are and what stocks you like to own, you have a better chance of eliminating short-term randomness and letting valuations revert to the mean over time. Besides, you probably feel then much more well. The mental and emotional side of investing is often overlooked in financial planning. If you’re a value investor who likes dividend stocks and suddenly own mostly growth stocks, you’ll probably be scared to sell those stocks when they go up or desperate to sell when they go down.
VUG TOTAL RETURN. DATA FROM YCHARTS
2. Take what the market gives you
Once you figure out what type of investor you are and what companies you like to own, you’ll be ready to buy and take what the market gives you during periods of weakness. Patient investors are in luck, as many top growth stocks are currently well below their highs.
Similarly, value investors had plenty of opportunities in 2021 to buy shares of top dividend stocks at a steep discount.
Most investors are unlikely to take sides when it comes to value, income or growth. Rather, they probably have a preference, but still prefer some sort of mix of investment types.
Timing the market is not a good idea, but being flexible is. If you for example Bitcoin and Ethereum missed out, now is your chance to buy at a better price. If you’ve been waiting to buy electric vehicle stocks, there are some good buying opportunities in this space as well.
Keeping some dry powder on the sidelines will give you the ammunition you need to profit from big company price drops.
3. Invest in companies you understand and want to own
One of the worst mistakes I made as an investor was investing too high a percentage of my portfolio in companies I didn’t understand. Peter Lynch, my favorite investor of all time, often quipped that people spend so much time analyzing the pros and cons of big purchases like a car or where they live, but are so quick to pour money into a hot investment idea without knowing what they’re actually buying.
Whether we like it or not, the fear of missing out (FOMO) is a powerful emotion that can prevent clear thinking and cause you to chase the next hot growth stock. That’s not a problem if the stock goes up. But when it drops more than 50%, as many of the hottest stocks in the Nasdaq-100 have done over the past year, it’s harder to know when the bleeding stops, or to have the conviction to hold the stock if you don’t understand it.
Be wary of a fickle market
It seems strange that many of the hottest industries and companies of 2020 could suddenly become the biggest losers of 2021. Besides, one could argue that the market has risen way too fast in 2021 given the interest rate and inflation risks. The Fed’s decision to raise interest rates did not come as a surprise. You’d think an efficient and forward-thinking stock market wouldn’t be so quick to react to predictable news to push prices down. But so far this year, it has done so.
No one knows, what the market will do in the short term or how long a trend will last. Instead of betting that value stocks will beat growth stocks in 2022, it’s best to stick with positions you like and plan to hold for several years, limiting the randomness that market fluctuations can inflict on your portfolio.
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This article reflects the opinion of the author, which is different from the "official" one Recommendation position of a Motley Fool premium advisory service may differ. Challenging an investment thesis – even one of our own – helps us all think critically about investments and make choices that help us become smarter, happier and richer.
This article was written by Bradley Guichard in English and published on 12.01.2022 on Fool.com published. It has been translated so that our German readers can participate in the discussion.
The Motley Fool owns and recommends Roblox Corporation.
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