If you’ve been investing for some time, you’re probably experienced with seeing the ups and downs of the market impact your financial picture. However, depending on how you approach investing, you may have experienced some unexpected results over the last year or so.
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That’s particularly true if you use some traditionally tried-and-true investing strategies, especially those focused on predicting how certain types of stocks will react to economic conditions. According to financial experts, it may be time to take another look at your overall investment strategies — particularly if you tend to utilize the practice of cyclical and defensive stocks.
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What Are Cyclical and Defensive Stocks?
If you’re an investor, you may be familiar with the investment strategy tied to cyclical and defensive stocks. As the Wall Street Journal noted, “One of the biggest simplifications in markets is to buy cyclical sectors when the economy’s booming, and defensives in a slowdown.”
A simple definition of a cyclical stock is one that’s tied closely to the macroeconomic conditions. Defensive, or non-cyclical stocks, remain generally unaffected by economic ups and downs.
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A Wave of Predictability
For a long time, investors have generally been able to work predictions about cyclical and defensive stocks to their advantage. Consumer staples like food retailers, utilities and healthcare have typically remained full of steady sales despite any economic slowdowns.
On the other hand, carmakers, banks and tech stocks were generally cyclicals. Their performances were more closely tied to the economy.
For investors, non-cyclical stocks have acted like a risk management tool for investment portfolios. “In the face of a market downturn, non-cyclical stocks can temper significant portfolio value loss due to their inherent stability,” according to SmartAsset. “Moreover, their consistent stream of dividends can aid in income generation, which is particularly attractive to investors who seek a steady income stream from their investments.”
Uncertain Patterns
Financial experts have said this investing pattern may no longer work for some people. One big reason is economic uncertainty has increased the challenge of predicting how cyclical and defensive stocks will perform.
Let’s look at some recent examples. The Wall Street journal noted that the prospect of Fed rate cuts, inflation-free growth and Chinese stimulus prompted a strong cyclical rally. But the challenge is that it only happened to some extent.
According to the Journal, “Technology stocks have messed up some of the basic measures, the boom in electricity demand has given boringly-safe utilities a growth tinge and war confuses everything.”
To sum up the concerns, the crosscurrents from tech and war make it challenging to rely on sectors that have traditionally followed cyclical and defensive patterns.
Complicated Solutions
The answer to how to adjust your investment strategy is a personal one. Your financial advisor may be able to provide some specific recommendations, particularly based on your own portfolio.
According to James Mackintosh, a senior markets columnist with the Journal, “Investors who want to take a defensive stance can still buy consumer staples or simply cut back on stocks in favor of Treasurys. Meanwhile bulls can delve below sectors to buy sellers of true discretionary products such as travel and tourism, gambling or luxury goods.”
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This article originally appeared on GOBankingRates.com: Why Financial Experts Say Your Investing Pattern May Not Work Like It Used To
