How to Invest with a Looming Recession

Many of the most successful long-term investors devise a plan and stick to it, no matter the larger environment. This means using discipline and removing emotion from investing.

Firstly, the stock market is concerned with how much profit businesses earn. Recessions are determined by changes in production. (Specifically, a recession is usually defined as a decline in GDP over two consecutive quarters.

Second, GDP is concerned with a broader group of entities. The stock market is the market for publicly-traded corporations. So by definition it’s only concerned with publicly-traded corporations. 

How to Invest with a Looming Recession

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Moving in and out of stocks (or in and out of certain sub-categories of stocks) usually doesn’t make sense, because of how hard this guessing game is.

So How Should We Invest?

That’s why it usually makes sense to just pick an asset allocation and stick with it, rather than trying to adjust your allocation based on events in the news. Conversely, it definitely can make sense to change your asset allocation when your life circumstances change.

Changes to the fixed-income side of a portfolio can make sense though, as economic circumstances change. That’s because current interest rates do give us some actionable information.

That is, the interest rate on a given fixed-income investment is a decent predictor of its rate of return (and it’s obviously a very good predictor, if you plan to hold to maturity). So shifting between fixed-income options as the available interest rates change is not crazy.

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