Permanent Value

Investing with the Wind at our Backs

Bruce Doole
July 16th, 2009

INVEST WITH THE ECONOMY NOT AGAINST IT….With the tremendous volatility in our financial markets these past 12 months, we thought it was appropriate to talk about how to invest in each part of the economic cycle and how we can use it in our investment portfolios. In every economic cycle there is going to be a period of slowing or negative economic growth, followed by recovery, growth, and ultimately inflation before the economy slips into recession again. We know that these cycles will happen, what we don’t know is when and for how long. If we were designing a portfolio to simply match the economic cycles, we would seek to eliminate asset classes that did well in the last economic cycle (which seems counterintuitive). We’d then invest in those assets that are going to do the best in the upcoming economic environment but may not have been performing well recently.

HOW DO WE NARROW DOWN THE CHOICES…So what do we do if it seems nearly everything is performing poorly, as we’ve seen the last 9 months? When the economy is in recession, usually it is bonds and healthcare investments that seem to do the best. Since these investments also did poorly in the recent financial crisis, they will probably be the first ones to rebound when the recovery starts. Typically, consumer discretionary stocks start to pick up as people feel more confident to spend and buy items they put off spending in the downturn. The next area to recover are financial companies (categorized as large value companies) which suffer the most from consumer overspending and borrowing and which are usually hit the hardest towards the middle of a recession. Smaller companies which are more nimble and can move faster lead the economy out of recession almost invariably. Finally, industrial companies and their suppliers pick up their orders as companies feel confident enough to invest in new equipment as orders start picking up. As the economy enters the growth phase, large growth companies start to shine and information and technology companies pick up momentum. As inflation starts to become more pronounced, hard assets such as real estate and commodities increase in price rapidly and energy prices spike. We finally enter a slowdown and utilities and income investments become much more attractive.

SO HOW DO I APPLY THIS TO MY FINANCIAL SITUATION?…You may remember being asked to fill out an Investment Profile Survey, which gave us information about your risk tolerance and attitudes towards investing. We use this information to build a personalized portfolio that reflects your attitude toward expected return and tolerance for volatility. Once your portfolio is built, it is then overlaid over our read on the economic cycle. The result is a portfolio that is both customized and positioned to take advantage of the current economic environment and have the highest likelihood of success. (If you feel your risk tolerance has changed, please give us a call.)

Permanent Value’s team is on your side to help you and we are going to use every tool at our disposal. By integrating your preferences with investments that work the best in each economic cycle, we can work together to find the best solutions. Staying focused is the key. Our philosophy is to minimize the time you have to spend on your finances so you can live life you want.