What is Countercyclical investing?
Countercyclical investing is a portfolio management process that starts with the understanding that there are four stages of the business cycle; i) Growth; ii) Overheating; iii) Recession; and iv) Recovery. Although every cycle is different, notably the time from start to finish and total amount of economic growth, history has shown that economies have followed the cycle pattern over and over.
From an investor’s perspective, each stage of the business cycle has a different impact1 on the performance of assets (stocks, bonds, commodities, real estate). Countercyclical investing acknowledges this and recommends portfolio holdings that align with the business cycle. For example, if you determine that you are in the 'Overheating' phase, it might be time to cash some chips or implement risk management strategies to protect your holdings. Determining the cycle stage is not a simple task and so the practical implications are often portfolio tweaks rather than wholesale changes. However, with a reliable cycle indicator, a rigorous investment decision process and a strong risk management framework, it adds up and has a powerful compounding impact on wealth over time.
For more information on the cycle indicators I use, the risk management techniques I implement or how this investment strategy might help you, please get in touch.
1. Verdad Capital: ‘Countercyclical Asset Allocation’, 2021
