How the business cycle affects different asset classes

Fsp Invest, 14 Jan. 2014

Tags: business cycle, asset classes, how the business cycle affects different asset classes, performance of different assets during different phases of the business cycle, how to allocate your assets, when do shares perform well, when do bonds perform well, when don’t shares perform well, how does recession affect asset prices



Different asset classes perform differently during different phases of the business cycle. And this means you should tailor your investment approach depending on which phase of the business cycle we’re in. Changing up your asset allocation can mean making better returns on your portfolio.



The business cycle—the cycle of alternating economic expansion and recession—affects the performance of different types of assets. 
 
Let’s take a look at the different types of asset and how they’re affected. 
 
How different asset classes perform at different stages of the business cycle
 
#1: Shares
Shares perform well when economic conditions are improving and businesses are making a profit. This means holding shares is most profitable during the recovery and expansion phase of the business cycle. 
 
Share prices decline during the contraction or recession phase of the business cycle. 
 
So it’s best to shift some of your portfolio to an asset that performs better during the contraction phase of the business cycle, such as bonds. 
 
#2: Bonds
As mentioned earlier, bonds perform best during the contraction phase of the business cycle, when interest rates decline.
 
They don’t perform as well when interest rates are rising during economic expansion. 
 
#3: Property
Property performs best during the recovery and expansion phases of the business cycle when interest rates are low but the level of employment is improving. 
 
#4: Cash
Cash is popular in the contraction phase, when business pessimism is high.
 
#5: Commodities
Commodities perform well during the expansion phase of the business cycle, when production is on the rise and commodities are in high demand. 
 
They don’t perform well when economic activity is contracting and manufacturers are reducing their rates of production. 
 
#6: Precious metals
Precious metals tend to perform well at the upper turning point of the business cycle, when industrial demand is high, and as a hedge against rising inflation. 
 
Keep in mind that different asset types perform better depending on what’s going on in the economy. If you follow these general benchmarks, you’ll be able to help your portfolio make gains no matter the stage of the business cycle the economy is in. 
 

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