On the Fence: Investment Grass Greener on the Other Side?

Picture two neighbors separated by a fence, both deciding how to seed and fertilize their respective lawns.

One goes for a combination that grows like crazy in a typical wet spring and turns a lustrous green — only to quickly brown during the first extended dry spell in the summer heat. The other opts for a heartier seed and slow-release nitrogen fertilizer that greens more gradually but holds up better throughout the summer.

Which do you prefer — or do you find yourself on the fence? As an investor, you can choose the dull-grass defense of stocks that stay alive during down cycles. Or you can go for the big-green offense of stocks that often yield bushels of cash clippings when it rains prosperity, but quickly go to seed during downturn droughts.

Some investors try to hop from one side of the fence to the other, relying on instincts or educated guesses about the future direction of the economy. As a result, they move aggressively into higher-risk, higher-return stocks when they expect a boom cycle, then shift into recession-resistant stocks in anticipation of a slowdown. But as anyone who has straddled a fence knows, a badly timed leap over a fiscal fence can be just as painful to your portfolio as a poorly timed leap over a physical fence is to your posterior. This is where tax accounting solutions in Brookfield and guidance from the best business tax experts in Brookfield can help investors make disciplined, tax-efficient decisions instead of costly emotional moves.

Fencing the Good

With clairvoyant timing, you can steal (off with) a great deal when stocks are at lows, and you don’t even have to lose any profits by fencing them at (deep discounts to) their highs. But the only market timing that’s been proven to work consistently is the opening/closing bell at the stock exchanges.

Furthermore, except on rare occasions, the “market” as a whole doesn’t go up or down. However, certain sectors tend to go up or down in unison in response to financial conditions that favor or disfavor them. So on a typical day when the market moves strongly up or down, a majority of sectors have moved either up or down.

When the economic horizon is bright for as far as the eye can see, the strongest-performing sectors feature companies that benefit from discretionary spending by individuals, businesses, institutions, and government. Think exotic travel, expensive cars, high-end electronics, home additions and improvements, new offices and plants, technology upgrades, and university construction projects. In addition, businesses keyed to strong economic activity also benefit — as financial-services firms almost always do during bull markets.

But when the economy is poised to cool, those same sectors often suffer. Company profits take a double hit as revenues decline while higher amortized expenses from prior expansion continue to weigh on the balance sheet. This can happen even when businesses are careful not to overextend themselves with capital investments and staff additions during boom times. Leveraging tax accounting solutions in Brookfield and working with the best business tax experts in Brookfield can help companies anticipate these cycles, manage expenses strategically, and protect profitability during economic downturns.

Some companies avoid this plight by internally diversifying into profit centers that aren’t so tied to the ebb and flow of business cycles. That’s one reason why many financial-service companies that focus on investments also have a big stake in insurance, which people need regardless of the state of the economy.

But companies that do best — although not necessarily great — in a slumping economy are businesses geared to providing the necessities or habitual desires of life, and those that offer alternatives to higher spending. This includes companies that sell food staples such as bread and cereal; auto parts and accessories for routine maintenance; home maintenance hardware and materials; and everyday personal care and medical-supply products. In addition, companies that cater to human weaknesses — such as smoking, drinking, gambling and prurient interests — also serve a steady market.

Combining Offense and Defense

Ideally, you want your investment portfolio to resemble the internal business portfolio of companies that combine “good-times” lines of business and continuing-consumer-needs businesses. That way, you’ll be in line for some of the huge gains possible when the economy is running hot, while having some cushion against when it is running cold.

However, there’s no universal recipe. The right mix depends on your individual financial circumstances and risk tolerance.