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If you’ve been investing for a while, you’ve probably experienced the ups and downs of the market impacting your financial situation. However, depending on how you approach investing, you may have seen some unexpected results over the past year or so.
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This is especially true when using traditionally proven investment strategies, especially those that focus on predicting how certain types of stocks will react to economic conditions. Financial experts say it may be time to rethink your overall investment strategy, especially if you tend to take advantage of cyclical or defensive stocks.
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What are cyclical stocks and defensive stocks?
If you’re an investor, you may be familiar with investment strategies related to cyclical and defensive stocks. As the Wall Street Journal pointed out, “One of the biggest simplifications in markets is to buy cyclical sectors when the economy is booming and defensive sectors when the economy is down.”
A simple definition of cyclical stocks is stocks that are closely tied to macroeconomic conditions. Defensive stocks, or non-cyclical stocks, are generally unaffected by the ups and downs of the economy.
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waves of predictability
For a long time, investors have generally been able to make predictions about cyclical and defensive stocks to their advantage. Consumer staples such as food retail, utilities, and healthcare typically maintain stable sales despite the economic slowdown.
On the other hand, automakers, banks, and tech stocks were generally cyclical. Their performance was more closely tied to the economy.
For investors, non-cyclical stocks have served as a risk management tool for investment portfolios. According to SmartAsset, “even in the face of market downturns, the inherent stability of non-cyclical stocks can limit significant portfolio value losses.” “Additionally, a consistent stream of dividends helps with income generation, which is particularly attractive to investors looking for a steady stream of income from their investments.”
uncertain pattern
Financial experts say this investment pattern may no longer work for some people. One big reason is that economic uncertainty increases the challenge of predicting the performance of cyclical and defensive stocks.
Let’s look at some recent examples. The Wall Street Journal said the Fed’s expected interest rate cuts, non-inflationary growth and China’s stimulus efforts helped fuel the strong economic recovery. But the challenge is that that only happened to a certain extent.
The paper reported that “tech stocks are undermining some fundamental policy, surging demand for electricity is giving boringly secure power companies a tinge of growth, and war is disrupting everything.” There is.
The concern boils down to the cross-currents of technology and war making it difficult to rely on sectors that have traditionally followed cyclical and defensive patterns.
complex solution
The answer to how to adjust your investment strategy is personal. Your financial advisor may be able to provide you with some specific recommendations, especially based on your own portfolio.
“Investors who want to take a defensive stance can buy staples or simply opt for Treasuries and reduce stocks,” said James McIntosh, the newspaper’s senior market columnist. On the other hand, bulls can dig below the sector to buy sellers of true discretionary goods such as travel and tourism, gambling and luxury goods. ”
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This article originally appeared on GOBankingRates.com: Why financial experts say your investment patterns may not work the way they used to
