(Bloomberg) -- It’s been a brutal stretch for retail traders. Stocks are approaching a bear market. A selloff wiped $200 billion off cryptocurrencies in a single day. And Morgan Stanley found that amateur investors who jumped into the market when lockdowns began in 2020 have lost all their gains.
Several factors are at play, but surging inflation is the biggest culprit. Rising prices prompted the biggest rate hike from the Federal Reserve in 22 years earlier this month, with more to come, and economists are increasingly predicting a recession over the next 12 months. The growing risks have sent markets into a tailspin, with the S&P 500 Index down more than 15% this year and the tech-heavy Nasdaq 100 slumping nearly 25%.
What’s an individual investor to do? The common rallying cry in down markets over the past few years has been to “buy the dip.” But what happens if the dip keeps dipping?
For advice on what to do — and how to correct course — Bloomberg News interviewed experts in some of the most popular investment categories for retail investors. Their suggestions are below:
Meme Stocks
The companies that embodied “retail mania” last year are suffering. GameStop Corp. is down more than 35% this year, and AMC Entertainment Holdings Inc. has slumped about 55%. The Solactive Roundhill Meme Stock Index, which tracks a basket of stocks favored by individual investors, has plunged by nearly half. So what should you do if you own a sagging meme stock?
John Belluardo, president of Stewardship Financial Services, says that if the money you put into memes was small compared to the rest of your portfolio, it might be worth staying put in hopes of a rebound.
“The other thing that I would look at is if they have other stocks that have done very well, if they invested in Apple a while ago or Tesla,” Belluardo said of people who may need to sell and want to take advantage of the loss for tax purposes. “Maybe they can take some profits and offset some of the capital gains by dumping the meme stock. That’s a good use of a loss.”
Tech Stocks
It’s not just the meme stocks. After powering the market through the depths of the pandemic, big tech names are plunging too, with Netflix Inc. down nearly 70% and Meta Platforms Inc. tumbling about 40% this year.
Experts recommend thinking about why you bought that tech name in the first place. Do you think consumers will still be using these services five or 10 years from now?
“A lot of the companies have really good track records and a lot of cash and they’re worth a lot of money, so it really doesn’t bother us that they’re going down,” said Deborah Ellis, a certified financial planner in Los Angeles.
If you find your portfolio is tilted too far toward tech, she suggests hedging with commodity exposure, like agricultural products or metals.
Katie Nixon, chief investment officer at Northern Trust, recommends increasing the quality of companies in your portfolio, meaning those with strong balance sheets, cash flows and dividends.
“If you have cash on the sidelines and it aligns with your long-term strategy, it could be a good time to get into equities,” Nixon said.
Cryptocurrency
Digital tokens plunged last week as the TerraUSD stablecoin, which was supposed to be pegged to the US dollar, cratered. Bitcoin sank to its lowest level since 2020 on Thursday and is down more than 50% from its November high.
For crypto investors in a turbulent market, experts recommend using the downward pressure to test your conviction in your coins, and to lean into those you believe have staying power.
“Until the macro conditions settle down, the fundamentals of crypto can't compete,” said Matt Hougan, chief investment officer of Bitwise Asset Management. “For individuals eyeing a long-term investment, now is an interesting moment to consider the market. If you're looking for a short-term trade, you're jumping into a volatile environment.”
Meet the Hedge-Fund Manager Who Warned of Terra’s $60 Billion Implosion
SPACs
A year ago, special-purpose acquisition companies, also known as blank-check companies, were all the rage with retail traders. Rather than following the disclosure-heavy IPO process, SPACs raise money from investors first, then look for a private business to merge with. If investors don’t like the choice of merger partner, they can opt out and get their money back.
SPACs attracted celebrities, who used their name recognition to attract attention (and funds). But in recent weeks, large global banks have been pulling away from such deals after new disclosure guidance from the Securities and Exchange Commission. The De-SPAC Index — which tracks 25 companies that have gone public through a merger with a SPAC — is down more than 50% this year.
Gordon Achtermann, founder and principal of Your Best Path Financial Planning in Fairfax, Virgina, says the lack of disclosure concerns him. He recommends that investors pore over whatever financial documents they receive about the SPAC’s merger target.
“What are the real prospects for return-on-investment for this thing? What’s their cashflow?” he said. “Really turn your B.S. detector up to maximum.”
Mutual funds and ETFs
Mutual funds and exchange-traded funds are known as some of the safest ways to invest. But what do you do when the entire market is falling?
For Thomas Kopelman, co-founder and financial planner at AllStreet Wealth in Indianapolis, now is the time to buy, especially funds tracking broad indexes like the S&P 500 or Nasdaq 100.
“If you look back in history, all the times the market has gone down it bounced back,” he said.
That assumes you’re investing for the long term, which is generally what advisors recommend. For those approaching retirement, it’s wise to examine your risk tolerance and consider your target retirement date, and adjust your portfolio accordingly.
“Now is not the time to veer away from your financial plan unless a shock like this gives you a wakeup call, and you say, ‘Maybe my risk tolerance was inaccurate,’” said Chris Diodato, founder of WELLth Financial Planning in Palm Beach Gardens, Florida.
--With assistance from Misyrlena Egkolfopoulou.
To contact the authors of this story:
Charlie Wells in London at [email protected]
Claire Ballentine in New York at [email protected]
