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On the defence: late cycle investing

Published by on August 


There is much discussion about portfolio positioning and considerations for late cycle investing.  Many of us would love a crystal ball, but alas, we don’t have one.  We are left to carefully weigh facts to help us make educated decisions and calculated risks with the information available to us.  

An economic cycle consists of a period of expansion (growth) followed a period of contraction (pull back) and the cycle repeats itself.  We don’t know how long expansions will be, nor when a contraction will begin, but we do know it’s a cyclical process.

Expansions and contractions have multiple swings of market volatility, bubbles and corrections along the way.   It can be a bumpy ride, but that’s the very nature of it.

There is an unbelievable amount of information that goes into the job of an economist reviewing global markets, analyzing trends, considering the impact of fiscal and monetary policies from different countries, currencies, manufacturing and sector trends just to name a few.  If you’ve ever taken a university level economics course you will have had a small glimpse of the range and multitude of global economic complexities.  There are many pieces of the economic puzzle.   Even the most educated and brilliant economists cannot say for certain specifically when a recession will begin.   

On an elementary level, what do we know about where we are today?  If we use US expansion data as our frame of reference, we know the average economic expansion lasts around 58 months.  We know the current expansion at the time of this article is around 121 months which makes it the longest economic expansion in US history.  No two expansions are the same, and this one has been considered weaker in terms of growth relative to previous expansions.

We know the average recession lasts about 11 months, which is much shorter than the average expansion in comparison, however investors tend to remember them more because of the negative emotions associated.  

A long running expansion does not always mean a recession is around the corner, but it is important to recognize as investors that we are most likely in a late cycle stage.  While an economic contraction may not be eminent, we are at a point where we should be prepared should the cycle start to change.

Late cycle portfolio management is similar to regular portfolio management where we look for diversification among sectors and investments as always.  In addition, we consider our clients’ life stage, income requirement and downside protection needs.  It's about tweaking our equity to fixed income ratios within portfolios as required.  It’s about being mindful about where we are in the economic growth cycle in conjunction with where our clients are in their life stage, investment needs, objectives and risk tolerance.

Again, we have no crystal ball.  The current expansion may continue to make history with its duration in the coming months, but we also need to recognize we may start to see signs of a pull back.   These late cycle signs layered with individual investment strategy should form the groundwork to make any necessary investment decisions accordingly.

Column appeared in the August 2019 edition of This Month In Elgin

Stephanie Farrow, BA., CFP., Stephanie has over 26 years' experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation.  Stephanie has been writing a financial column for local business magazine Elgin This Month/This Month in Elgin since 2010.  Stephanie and her husband own Farrow Financial Services Inc.  About our Farrow Financial Team.

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