Business cycle-dependent asset allocation

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prioritarian
Posts: 485
Joined: Tue Jul 16, 2019 6:00 pm

Business cycle-dependent asset allocation

Post by prioritarian »

I've been using business-cycle-dependent asset allocation since the 2000 bubble and my interest in this asset allocation mechanism has only increased based on my increasing knowledge of leading and coincident recession indicators (e.g. yield curve-based modeling, Sahm-rule, housing starts/sales [hat tip Calculated Risk!]). This is market timing on a 2-10 year cycle but it's still market timing. However, one way to rationalize this from a bogleheads perspective is to state that my risk tolerance and, hence, AA changes on a multi-year basis due to empirical indicators (e.g. it's not emotion-based).

Examples of recession prediction tools:

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The following graph from Fido illustrates the back-testing rationale for this approach:

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https://institutional.fidelity.com/app/ ... 953042.PDF

In practice I only business-cycle time twice per cycle. Once prior to a predicted recession and once during my best estimate of mid-cycle (this is the least empirical part of this approach). For example, I increased my equity allocation by ~10% JanFeb-May 2020 (based on leading and coincident recession indicators) and am now starting to "rebalance" into my desired bond-heavy mid-late cycle AA.

I'm curious if other bogleheads forum members also time the business cycle and what "buy and hold" bogleheads think of this slightly more dynamic asset allocation.
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