Up until recently, backing US stocks has been a winning move. Anyone investing in the S&P 500 at the beginning of January 2020 via a simple, low cost exchange-traded fund (ETF) would have more than doubled their money five years later.
But the volatility seen in the last couple of months must surely be pushing some to ask whether the ‘party’ is now over, at least for a while. For the record, I’m one of them. In contrast to some investors however, I’m absolutely loving it.
Growing unease
As tends to be the case with most big falls in the market, there hasn’t been just one catalyst. The loss of faith among investors can be blamed on a toxic mix of concerns about the health of the US economy in the wake of bouncing inflation, the ‘interesting’ strategy (or lack of) adopted by President Trump when dealing with other nations and already-highly-valued asset prices.
At least some of the recent fall is also down to the growing unpopularity of some of the S&P 500’s biggest constituents. Electric vehicle (EV) firm Tesla (NASDAQ: TSLA) is an easy target here.
Whatever our thoughts on Elon Musk’s involvement in politics are, the numbers don’t lie. The value of the EV maker has plummeted over 40% since markets kicked back into life in January.
Is the fall overdone?
Now, there’s an argument for saying that investors have simply flipped from being too optimistic to too pessimistic on Tesla. A lower-priced new model due later this year could revive interest. There’s also the company’s growing presence in artificial intelligence (AI) to consider. Evidence that the CEO has returned to his day job would help too.
Even so, I suspect Musk’s behaviour has put some potential buyers (and investors) off for good. We know that sales are tanking in Europe, China and Australia. The next set of delivery numbers could prove even worse than analysts are already projecting.
Concerningly, the stock still trades at a seriously high price-to-earnings (P/E) ratio as well. This suggests a lot of potential growth is already priced in.
Here’s what I’m doing
I’ve never held Tesla stock directly, nor do I hold a fund that only tracks the return of the S&P 500. However, I still have a lot of money invested in US stocks via a number of world exchange-traded funds (ETFs).
So am I worried? Not at all! The ETFs I own spread my cash across thousands of stocks around the globe. Sure, this dilution means my wealth will grow at a slower rate than if I only picked the biggest winners. But it also allows me to sleep at night and not worry about when Tesla stock will recover (if it can).
However crass as this may sound, the only question I’m asking is whether the world’s largest economy is doomed. While things look tricky in the near-term, I just can’t see it. For this reason, I’ll continue investing into these funds. If the index keeps falling, I’ll be buying more shares at a lower price.
Although we can’t know the future for sure, a buy-and-hold strategy like this has been shown to deliver brilliant returns over the long term.
Rather than worry about the possibility of a full-blown crash, I’m rubbing my hands at the prospect.
