Business Cycles, Sector Tilts, and Investment Policy

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Sector tilting during cycle phases is one way to improve your risk-adjusted performance.


The ebb and flow of economic activity is called the business cycle. A cycle consists of expansions occurring at about the same time in many economic activities, followed by general slowdowns, recessions and recoveries, which merge into the expansion phase of the next cycle.

During each of these business cycle phases, certain market sectors and the industries that feed into them outperform the market averages, while others underperform. Investment policy is a tool for taking advantage of this disparity in performance by tilting portfolio allocations in a way that lines up with where we are in the cycle.

Changing your sector tilt as the economy and the market transition from one phase to the next can boost your returns and increase your Sharpe and Sortino ratios, if done judiciously.