How should we invest for a recession? I’m seeing all kinds of recommendations, and it makes it sound like investing is so much more difficult in these hard times.
We should get out of growth stocks, move into defensives, adjust our asset allocation strategies, increase our weighting in bonds, or maybe gold, or whatever…. gah! It’s no wonder some folk are thinking they should await better times.
But I feel it would be a crying shame to turn our backs on all the cheap shares I think I’m seeing now. No, for me, the way to invest in a recession remains relatively straightforward.
What difference does a recession make? It can make things harder for a lot of families. And for a lot of companies too. Those whose businesses depend on discretionary spending, for example, could be in for a tough stretch.
But the technical existence of a recession just means the economy is shrinking rather than growing, even if only a little bit. Forecasts suggest around 3% growth in 2022 due to the Covid rebound. And then a couple of years of maybe 1% annual declines.
These are just best guesses. But as recessions go, nobody’s taking about a repeat of the 1930s here.
It looks like 2022 is shaping up to be one of the best years ever for FTSE 100 dividends, perhaps second only to the record year of 2018. And it’s been one of the best years for share buybacks so far too.
We’ve already had several months of high inflation. The full effects of the economic squeeze, though, are still ahead of us. And some companies have started cutting back their dividends as a precaution.
But the amount of cash that UK companies have generated in 2022 convinces me of one thing. I reckon our best companies are in good shape to see out a recession and get back on the road to growth. And many of their shares are on very low fundamental valuations right now.
How to invest
This brings me to a key Warren Buffett principle. The billionaire investor famously likened buying shares to eating beef. If we want to consume burgers throughout our lives, we should be happier when cattle prices are low.
The same is surely true for buying shares. We can get more for the same money when share prices are down. And if we’re in it for the long term, that’s got to be good, right?
My approach is to just continue with my own investing strategy, and keep on buying as many FTSE 100 dividend shares as I can. With less spare cash, I might buy fewer than last year, but that’s fine.
I’ll be careful to remain well diversified. I think that can be especially important during a down spell, as some sectors can suffer disproportionately. But I diversify anyway, so there’s no change there.
For me, the simple answer to the question of how to invest in a recession is… the same way I do at any other time. I want more of those cheap cows, both the beef and cash variety!
Views expressed 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.
Motley Fool UK 2022