Can my investment approach survive a stock market crash?

Our writer sets out his plan for the next stock market crash, whenever it may come.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Young Caucasian woman with pink her studying from her laptop screen
Investing Articles

Where will the ITV share price go in 2025? Here’s what the experts say

The ITV share price has been heading up and down as the TV producer and broadcaster has been making the…

Read more »

Investing Articles

3 rules I followed to start investing

Christopher Ruane shares a trio of considerations he used to start investing in the stock market -- and continues to…

Read more »

Investing Articles

UK investors are obsessed with Nvidia stock! Here’s why

This writer considers a few reasons why Nvidia stock has gone up so dramatically in recent years and whether he'd…

Read more »

Investing Articles

Cheap FTSE 100 shares to consider buying after the Black Friday sales

Whatever bargains retailers are offering for Black Friday, stock brokers aren't joining in. I reckon I see enough cheap shares…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

P/E ratio of 6! Is the Centrica share price a bargain?

This writer reckons the current Centrica share price could be a real bargain. But as a former shareholder, will he…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

What sort of British companies has Warren Buffett invested in – and why?

Warren Buffett has fished on both sides of the pond over the decades in a hunt for bargain shares. Our…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

Here’s how I’m investing in dividend shares to aim for long-term wealth

Our writer plans to turn investments in dividend shares into a retirement pot by implementing a structured, long-term approach.

Read more »

Investing Articles

With their 7.2% dividend yield, are Aviva shares a bargain?

Our writer explains why the Aviva dividend outlook and its current valuation mean he sees it as a share investors…

Read more »