Image source: Getty Images
Currently, the economy is getting weaker and weaker. The pound has fallen sharply, we are in recession, and inflation is still high. All of these factors contribute to investor uncertainty. So, not only can declining business fundamentals push some stocks lower, nervous investors can do that too. But what could a recession — or a stock market crash — mean for the way you invest?
The next stock market crash
Stock markets are cyclical – they move up and down over time.
A stock market crash is a significant drop in price of 20% or more that occurs in a short period of time. We know there will be another stock market crash in the future.
But no one knows for sure when. It can happen today. It may come next year. Or perhaps, for example, a cheap pound would make British industry more competitive, drive up stocks and keep it from crashing for decades.
Some of these scenarios seem more likely to me than others. But it is not known for sure which will be done. This is one of the reasons why I, as an investor, do not try to time the market. I don’t believe anyone knows for sure what will happen in the market, although some people say the opposite.
A long-term investment approach
So, how do I prepare for an uncertain future? After all, such a crash can hurt the value of my portfolio.
I hold some defensive stocks that I hope will perform well in such a scenario. For example, I am the owner British American Tobacco. Its shares are up 27 percent over the past year. I think that if the market falters, the relatively resilient tobacco revenue stream will help support the stock price. But that is not guaranteed. The company also faces risks such as a decline in the number of smokers eating into its revenue.
But some of the stocks I hold seem to be exposed to immediate price risks of a stock market crash. For example, a retailer Dunelm If consumers have less money to spend, it could see a drop in sales. That may explain why its shares are 49% cheaper today than they were a year ago.
Buy and hold
But is this important to me? After all, I have no plans to sell my Dunelm shares. If I put them, it’s just a waste of paper. The stock price may recover in the future. Meanwhile, Dunelm has a dividend yield of more than 5 percent.
If anything, a stock market crash might give me an opportunity to buy more shares in companies that I think have a promising future. I thought Dunelm’s stock price was attractive when I first bought it. I have not changed my attitude towards the company. Even a failure can be positive for him as many consumers turn to his competitively priced offerings. Therefore, a decline in stock price gives me an opportunity to buy a quality stock at an attractive price with the intention of holding it for the long term.
In light of this, I don’t think my investment approach can survive a stock market crash – I hope it can help me benefit!