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Attempting to de-risk ahead of a recession can have significant downside. In short, “being early” can look a lot like “being wrong.”

De-Risking Main Final

As the current economic expansion approaches its 10th anniversary (which would make it the longest in U.S. history), the recent yield-curve inversion hasn't gone unnoticed by investors. However, pulling money out of the market and de-risking before a recession can be costly for investors. History has shown that timing the market is virtually impossible, since you have to be right twice (when to get out and when to get back in).

As illustrated above, the equity market has typically provided positive returns in the latter stages of an expansion, and the average returns since the 1930s for the one- and two-year periods prior to a recession were 8% and 21% respectively. By going to the sidelines, investors aren't only potentially missing out on positive returns prior to an economic downturn, but also creating the exceptionally difficult proposition of correctly timing a return to equities in the future.

As the saying goes, expansions don't die of old age, and correctly predicting the timing of a recession is just as impossible as timing a stock market sell-off. Ultimately, attempting to de-risk a portfolio in advance of a potential recession can prove to be a costly endeavor.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.