Let’s face it: this year has been a tough one for share investors.
Growth stocks have tumbled in price as the NASDAQ Composite Index enters a bear market, down close to 27% year to date.
Well-known names such as Nike (NYSE: NKE) and Google’s Alphabet (NASDAQ: GOOGL) have declined by 36% and 28%, respectively.
High inflation also threatens to crimp consumer spending as more people tighten their wallets and purses.
In response to runaway inflation, central banks around the world are hiking interest rates sharply.
With borrowing costs rising, companies face a double whammy of reduced demand and higher finance expenses.
Income investors are also feeling worried as the REIT sector gets hit by poor sentiment.
REITs such as Keppel DC REIT (SGX: AJBU) and Elite Commercial REIT (SGX: MXNU) are hitting their 52-week lows.
Faced with such an environment, does it still make sense to adopt a buy-and-hold strategy?
Strong businesses can continue to perform
First off, it’s critical to understand one important thing about investing.
When you buy shares of a company, you’re not just purchasing a ticker with a price tag on it.
What you’re doing is buying partial ownership in a living, breathing business.
And by focusing on resilient businesses with strong track records, you can build a portfolio that you can hold through different economic conditions.
Take blue-chip stocks such as DBS Group (SGX: D05) and Singapore Exchange Limited (SGX: S68), or SGX, for instance.
The former is the largest bank in Singapore that has reported a robust set of earnings for its fiscal 2022’s first half.
The latter is a bourse operator that enjoys a natural monopoly, thus offering investors protection against a severe downturn.
SGX recently reported its highest revenue on record for its fiscal 2022 ending 30 June 2022.
You also don’t have to worry about REITs with strong sponsors and a stellar track record of raising their distributions.
A good example is Mapletree Logistics Trust (SGX: M44U), or MLT.
MLT’s distribution per unit has not only risen for six consecutive years, but the REIT is also an acquisition specialist that enjoys positive rental reversion and has hedged the majority of its borrowings on fixed rates.
The frictional costs of excessive activity
Buying stocks and holding them over the long run also minimises your expenses.
Every time you buy or sell a stock, your broker earns a commission from it.
And as your level of activity increases, you will end up paying increasing amounts of trading costs, thus ratcheting up your overall expense level.
Think of it like sandpaper that is wearing away your returns and exacerbating your losses.
Hence, a buy and hold strategy makes sense if the business is strong as you can also keep your transaction expenses low.
Volatility happens – move on
If stock market participants were robots without any emotions, then you’d see stable share prices along with rational decision-making.
In reality, the market is made up of millions of humans filled with emotions such as fear and greed.
With significant amounts of money involved, it’s no wonder the market gyrates wildly when there is either good or bad news.
Volatility should thus be viewed as a normal aspect of stock markets.
It is a characteristic of a healthy stock market and should not be viewed with worry or dread.
It’s only when share prices are sold down to bargain basement levels do we get attractive opportunities to buy at cheap prices.
Hence, volatility should be treated as a friend, rather than a foe.
Get Smart: Stay vested and compound your wealth
In a hyper-connected, fast-paced world, a buy-and-hold strategy may seem antiquated.
But nothing could be further from the truth.
By owning great companies that can increase their profits, cash flow and dividends, you can grow your wealth through a rising share price along with higher dividends.
Reinvesting these dividends can further help you to compound your wealth, bringing you one step closer to your retirement goals.
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Our safe-harbour stocks are a set of blue-chip companies that have been able to hold their own and deliver steady dividends. Growth accelerators stocks are enterprising businesses poised to continue their growth. And finally, the pandemic surprises are the unexpected winners of the pandemic.
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Disclaimer: Royston Yang owns shares of Nike, Alphabet, DBS Group, SGX and Keppel DC REIT.
