Buy and hold? Sell in May and go away? Bull market, bear market or lambs-to-the-abattoir market?
You will find no shortage of financial commentators trying to scare you out of the market and out of your holdings. Their advice often comes with the candy coating that "they are just trying to help you avoid losses", but there is poison within the message. Sure, it is painful to see your investments decline in value and there is rarely any good reason to hang on to a failed idea, but if you worry too much about trying to time the market, you will sell yourself out of any chance of reaping long-term gains. (For related reading, check out 4 Ways To Weather An Economic Storm.)
In other words, no matter what the economy looks like, there are always stocks worth owning.
In Pictures: 8 Ways To Survive A Market Downturn
Economies Do Not Stop
If you look around a bit, you see that even in the worst possible conditions there is still business activity. The way things sound on the news sometimes you would think the economy has completely stopped, but people are still shopping at the malls and going into restaurants. In other words, money is still being spent even if it is not as much as in the past.
In times like these, the stand-out companies find a way to reach into people's wallets. Apple (Nasdaq:AAPL) does not seem to have trouble convincing people to pay for its devices, and the lines at Panera (Nasdaq:PNRA) are still long. The key, then, is identifying those companies that will continue to convince shoppers that they still deserve that hard-earned money.
One way to do this is to find those companies where you see what one might call "irrational exuberance" about a product. I have managed, for example, to happily live my life without a single Apple product - a notion that would drive some Apple fans to distraction. Of course, I am not talking about anything truly irrational here - I am talking about a deep sense of customer loyalty and a strong commitment to customer service. There is, after all, a good reason that Southwest (NYSE:LUV) has kept flying through thick and thin and Olive Garden (owned by Darden (NYSE:DRI)) still has customers walking through the door every night.
Tough Times Lead To New Ideas
One common aspect of tough times is that "better and cheaper" comes back into vogue. The argument here is pretty straightforward - if you offer more for less in a time when people feel especially stretched, they will love you for it. These are the times when better logistics, better design and cheaper sourcing really shine - and those are the factors that let a company like Hennes & Mauritz (known to shoppers as "H&M") really stand out through hard times. Successful investing is not always (or even often) about finding the next revolution - often it is about finding the company that has managed to shave five cents off of the cost of a widget and pass that savings along to customers. (For more, see Industries That Thrive On Recession.)
Some Sectors Aren't As Dependent Upon the Economy
It is almost cliché by now to point out that companies in sectors like healthcare, food, alcohol and so on continue to see customers line up no matter the state of the economy. But the fact still stands that the economic ups and downs of the past 10 years really have not gotten in the way of companies like Gilead Sciences (Nasdaq:GILD) selling products that people really need. If you hold stock in a company that can count on reliable sales through almost any cycle, that can be a powerful asset in tough times.
Truly Innovative Companies Win
Above all else, innovation almost always wins and if you can find these companies, you can usually hold on to through thick and thin. The key here is innovation and not invention; selling people on a brand new thing (particularly one that lacks familiar reference points) is a much different process than selling people on an old thing done in a new way.
The catch is that these companies will almost always appear to have a lot of competition. What you must do as investor is dig in deeper and see which companies are doing things in a way that nobody else is quite able to match. Moreover, keep an eye on the R&D lines - companies that are truly committed to turning out a series of better mousetraps will not pull back on investing in the future just because the economy hits a sour patch.
Seek and Ye May Find
If you spend a little time poring over market history, you will see plenty of companies that have grown steadily and impressively through the last two recessions, along with stock prices that have generally followed the rise. That is a powerful argument against simply running to the bunker and hiding until the bad market passes. By all means, trim your holdings of stocks that are vulnerable to an ongoing malaise, but do not let the fears that always surround recessions to chase you out of truly excellent companies that can be long-term winners for your portfolio. (For further reading, check out 4 Tips For Buying Stocks In A Recession.)
Catch up on your financial news; read Water Cooler Finance: I-Spy, IPOs And iPhones.