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IMA Executive News & Views Blog

Why not de-risk late in the cycle?

by Jim Baird et al

Plante & Moran, PLLC is an IMA Member

De-Risking Main Final

As the current economic expansion approaches its 10th anniversary (which would make it the longest in U.S. history), the recent yield-curve inversion hasn’t gone unnoticed by investors. However, pulling money out of the market and de-risking before a recession can be costly for investors. History has shown that timing the market is virtually impossible, since you have to be right twice (when to get out and when to get back in).

As illustrated above, the equity market has typically provided positive returns in the latter stages of an expansion, and the average returns since the 1930s for the one- and two-year periods prior to a recession were 8% and 21% respectively. By going to the sidelines, investors aren’t only potentially missing out on positive returns prior to an economic downturn, but also creating the exceptionally difficult proposition of correctly timing a return to equities in the future.

As the saying goes, expansions don’t die of old age, and correctly predicting the timing of a recession is just as impossible as timing a stock market sell-off. Ultimately, attempting to de-risk a portfolio in advance of a potential recession can prove to be a costly endeavor.

To view the original article and review the summary, click here.