The economy is looking in increasingly poor shape right now. The pound has fallen sharply, we are in a recession, and inflation remains high. Those factors could all contribute to investor unease. So, not only might deteriorating business fundamentals lead some shares lower, but nervous investors may also trigger that. But what could a fall – or even a stock market crash – mean for the way I invest?
The next stock market crash
Stock markets are cyclical – over time, they move up and down.
A stock market crash is a significant fall in value, of 20% or more, that happens over a short period of time. We know that there will be another stock market crash in future.
But what nobody knows for sure is when. It could happen today. It might come next year. Or it may be that, for example, a cheaper pound forces British industry to become more competitive, leading shares up and avoiding a crash for decades.
Some of those scenarios seem more probable than others to me. But there is no certainty about which one will come to pass. That is one reason why, as an investor, I do not waste energy trying to time the market. I do not believe anyone knows for certain what will happen next in the market, although some people may claim otherwise.
A long-term investment approach
So, how do I prepare for an uncertain future? After all, such a crash could be painful for the paper value of my portfolio.
I hold some defensive shares that I hope might actually do well in such a situation. For example, I own British American Tobacco. Its shares have increased by 27% over the past year. I think that if the market wobbles, the relatively resilient revenue flows of tobacco could help support the share price. That is not guaranteed, though. The company does also face risks, such as a decline in the number of cigarette smokers eating into revenues.
But some of the shares I own seem more immediately exposed to price risks from a stock market crash. For example, retailer Dunelm could see sales fall if consumers have less money to spend. That may explain why its shares are 49% cheaper today than they were a year ago.
Buy and hold
But does that matter to me? After all, I have no plans to sell my Dunelm shares. If I keep them, the paper loss is only that. The share price may recover in future. Meanwhile, Dunelm has a dividend yield of over 5%.
If anything, a stock market crash might give me the opportunity to buy more shares in companies I think have a promising future. I already thought the Dunelm share price was attractive when I bought it. I have not changed my view of the company. Even a recession could turn out to be positive for it, as more shoppers turn to its competitively priced offering. So a falling share price offers me the chance to buy what I think are quality shares at an attractive price, with the intention of holding them for the long term.
In that sense, I do not just think my investment approach could survive a stock market crash – I am hopeful it might help me benefit!
The post Can my investment approach survive a stock market crash? appeared first on The Motley Fool UK.
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C Ruane has positions in British American Tobacco and Dunelm Group. The Motley Fool UK has recommended British American Tobacco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.