When the economy wobbles, the effects can be widespread. Growth companies can find it harder to raise funds. But even well-established businesses may find customer demand slumps, hurting profits. That can knock share prices, sometimes badly.
But I see myself as a buy-and-hold investor. Could that strategy help my portfolio perform strongly during a recession?
The theory of buy-and-hold investing
Some people buy shares simply hoping to sell them onto other people for a higher price than they paid. That, as far as I am concerned, is speculation. The value of the underlying asset is sometimes not even considered. Rather, this is a game of pass the parcel in which players hope they can profit from momentum more than business fundamentals.
I see investing as quite different to that. It is a way of getting exposure to a business that hopefully has great future prospects. For example, in the long term, I expect food maker Cranswick to perform well.
Inflation may hurt profits in the short term and changing consumer tastes could see revenues ebb or flow. But, overall, I think the company’s proven business model and strong industry position mean it could be very profitable in future.
Does that mean that owning shares in a firm like Cranswick will be a smooth ride? No. My outlook may be too optimistic, or the share price could move down (it is currently 13% lower than a year ago, for example).
But buy-and-hold investing does not typically involve owning a share for just a few months. Rather, the approach emphasises how, over the course of years or even decades, a quality business can hopefully reward shareholders handsomely. Over the past decade, for example, the Cranswick share price has more than tripled.
What happens in a recession
In a recession, people might want to raise money by selling their shares. On top of that, businesses can struggle with tighter credit, less demand, and rising costs.
That means although the share prices of great companies may rise even in a recession, they can also fall — sometimes sharply.
However, there is a difference between the price of a share and the underlying value of the business. A fall in a company’s share price might actually offer me a buying opportunity as a long-term investor.
Does buy-and-hold investing work well in a recession? I think answering that question requires a long-term perspective.
Some of the shares I have bought to hold may see their prices fall in a recession. But if I correctly identify promising businesses selling at attractive prices, my approach could be rewarding over time. Using a buy-and-hold investing strategy during a recession might not seem rewarding for me at the time. But, with patience, hopefully it will be over time.
Don’t forget the dividends!
Investing in great companies often has another advantage, regardless of share price movement: dividends.
Dividends are never guaranteed. But if a company paying them has a proven, resilient business model and is conservatively managed, then hopefully it might keep paying out even in an economic downturn. For example, Cranswick has raised its dividend annually for more than two consecutive decades.
The post Could buy-and-hold investing work well during a recession? appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.