Could a recession be on the horizon?
Maybe. Maybe not. Recessions are notoriously difficult to predict, even when signals are starting to flash red. But that doesn’t mean investors should do nothing. Since the stock market tends to lead the economy by several months it’s often better to be proactive. Late in the economic cycle can be a good time to re-evaluate portfolios, ensuring they are properly balanced and positioned for elevated volatility.
Some may think the best way to prepare portfolios for a recession is to drastically reduce stocks in favor of bonds. The problem with this approach is that it requires a soothsayer-like ability to time the markets. Some of the strongest returns can occur during the late stages of an economic cycle and immediately after a market bottom, so being wrong on either turning point can be devastating to long-term returns. A more realistic approach may be to maintain an appropriate balance between equities and fixed income but upgrade the quality of both.
In volatile markets, investors often tilt their equity portfolios toward value investing and focus more on dividend stocks. This can be an effective way of reducing portfolio risk, but it can also give investors a false sense of security if they don’t know what they’re buying. Here we highlight three common assumptions often made by investors when they look to increase their value-oriented allocation followed by a suggestion for what may be a better way to upgrade equity portfolios.Continue reading on Capital Ideas for five tips to avoid when investing ahead of a recession.