Investing is scary sometimes, and when the market doesn't appear to be going your way, buzz words and warning signals can often add to this often unnecessary stress.
The 'buzz phrase' of the moment is 'valuation reset' and, while many investors are using it in a positive sense, there is still plenty of confusion.
A 'valuation reset' is a phrase used by investors in relation to stocks that have seen massive growth in the past year and are experiencing a sharp drawback now in 2021.
Really, it is just a fancy word for a mini-correction. While the definition of a correction in the stock market is 'a decline of 10% or more in the price of a security from its most recent peak', a valuation reset is found, rather ambiguously, somewhere below this number.
Few will ever forget the correction that the stock market went through around this time last year as the realities of COVID-19 began to hit home. The S&P 500 (NYSEARCA: VOO) had taken just 6 days to fall 10% from its highs, while the biggest names such as Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) were also plummeting.
We are not quite at that level yet though.
There are 3 reasons:
For the long-term investor, valuation resets can be very healthy and can give better entry points to stocks that have become very expensive. Although seeing your portfolio lose big gains can be tough, so far most of these stocks that are falling are still actually far above the levels they were at this time last year.
By sticking to a long-term investment strategy, it truly simplifies things. Think of this valuation reset like a discount sale on all of your favorite stocks. In 10 years, you won't even remember this dip.
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