Asset allocation during recession

sequoia · Post by **sequoia** » Sat Feb 16, 2008 10:37 pm

Hi all,
I am going through the process of rebalancing my 401k and other investments.
One thing I am thinking of is tuning my asset allocation to a recessionary scenario. If one does believe we are in a recession that would last at least a year, how should that logically effect your asset allocation?
The following is my guess, but gurus can comment:

Foreign stocks (overweight, assuming you believe recession is localised in US)
Large cap (overweight, since they are likely to survive the recession)
small/medium cap (underweight)
Bonds (underweight? )
Sector specific funds, specifically Tech, Realestate (??)

-sequoia

SubtleFriend · Post by **SubtleFriend** » Sun Feb 17, 2008 1:55 am

My take on this is that AAP is not chosen based on recession or boom but rather on your timeframe and risk tolerance. I would ask the question how would you know when the recession ends in order to re-tune your portfolio back. Wouldnt that be market-timing. Rebalancing is not done to account for market conditions but rather to put back your investments in line with your AAP. On the other hand the present market scenario might have helped you realize your true risk tolerance and that might help you in adjusting your AAP. I am no expert on this.

sequoia · Post by **sequoia** » Sun Feb 17, 2008 3:56 am

I agree that this is market timing, and not really asset allocation/rebalancing in the traditional sense.

Assuming one is ok with taking the risk with market timing, what is the answer? Asked another way, how do these asset classes perform during a recession compared to a regular economic condition?

SubtleFriend;81775My take on this is that AAP is not chosen based on recession or boom but rather on your timeframe and risk tolerance. I would ask the question how would you know when the recession ends in order to re-tune your portfolio back. Wouldnt that be market-timing. Rebalancing is not done to account for market conditions but rather to put back your investments in line with your AAP. On the other hand the present market scenario might have helped you realize your true risk tolerance and that might help you in adjusting your AAP. I am no expert on this.[/quote]