The U.S. economy is entering its 11th year without a recession -- its longest economic expansion ever. This growth will not continue forever, but that doesn't mean it will necessarily end soon, either. Smart investors know that correctly predicting when a recession will hit isn't necessary to successfully manage an investment portfolio, as long as they keep a few things in mind.
1. Maintain a long-term perspective
Many market participants focus too much on short-term stock price fluctuations. They tend to feel good when stock prices increase and become anxious when they fall. This often leads to bad investing decisions. But if you are a long-term investor in good businesses and you are investing money you don't need for another purpose for many years, you can safely ignore these fluctuations and avoid the harmful effects they can have on your psyche. If you are investing to maximize your wealth many years into the future, you should focus on buying high-quality growth stocks at reasonable prices. These are businesses that should be much larger and more profitable many years down the road. A portfolio of companies like this should appreciate nicely over time as long as you paid a reasonable price.
2. View stocks as long-term ownership stakes in businesses, not blips on a screen
The most successful long-term investors, including Warren Buffett and Charlie Munger, view stocks as ownership stakes in businesses, not blips on a screen that jump around. In fact, they think of stocks no differently than they think of their ownership of private businesses. When investors adopt that mindset, they tend to focus more on the things that actually matter, like long-term business results, and ignore the things that don't matter, like short-term stock prices. This is healthy because focusing on the latter tends to result in over-trading and sub-par results. For example, many retail investors got spooked and sold their stocks during the financial crisis only to miss out on the subsequent rebound and recovery. Viewing stocks as ownership stakes in real businesses and ignoring short-term market volatility can help us focus on the things that actually matter and achieve better results throughout the economic cycle.
3. Own resilient businesses trading at reasonable prices
Predicting the timing of recessions is impossible, but it's safe to assume one will come eventually. So should we hunker down, stuff our cash in a mattress, and wait for it? No. That will often deliver a bad result because you'll usually miss out on the gains in the stock market. You'll also end up watching the value of your cash depreciate in real terms (after you factor in inflation).
To protect against recessions, investors should focus their search on businesses where demand for their products and services is more or less steady or growing over the long term. Consumers are unlikely to cut back on toothpaste made by Colgate-Palmolive (CL -1.32%) or Procter & Gamble (PG -1.33%) when times get tough since toothpaste is a low ticket item and consumers gravitate toward trusted brands when it comes to oral care products. Similarly, consumers probably won't cancel their high-speed internet connection from Comcast (CMCSA 0.81%) when times get tougher. And most pet owners are unlikely to stop buying dog food from retailers like Chewy (CHWY -0.06%) since most pet owners consider their pets to be a member of the family these days. For example, during the financial crisis and Great Recession, overall U.S. consumer spending declined but spending on pets increased 12% between 2008 and 2010.
4. Own businesses that offer customers a better value proposition
I like to own businesses that sell a product or service that is a clearly better value proposition for its customers. Netflix (NFLX -0.44%), for example, costs $12.99 per month for the standard plan in the U.S. and offers a gigantic and growing library of compelling content. That price is a fraction of the cost of the typical cable TV package of $80 or $100 per month or the cost for a family to go to the movies. Similarly, Costco (COST 1.91%) is popular because it saves its members so much money on their households' food and other needs. Not too surprisingly, Costco's membership base grew straight through the financial crisis and Great Recession. These sorts of companies actually strengthen their competitive positions during tough times and often emerge stronger. So while many fret over the timing of the next recession, long-term investors usually benefit by owning companies that are likely to endure and prosper regardless of what the future may hold.