First, don’t throw out a good asset allocation. The key decision you make is how to allocate your funds among major asset classes: stocks, bonds and real estate. Your second decision is how to allocate into sub-classes, such as domestic stocks, international stocks, small cap stocks, etc.
Second, if you like to play around in individual stocks, here are some guidelines. The most cyclical sectors of the economy are discretionary consumer spending, business capital goods, and basic materials. Among the financial sector, brokerage companies are very cyclical, but banks and insurance companies much less so.
The least vulnerable to recession, the so called defensive sectors, are consumer staples, utilities and health care (which is really a consumer staple but often broken out separately). If you’re worried about recession, dial down your exposure to the cyclical sectors, replacing those issues with defensive sectors. If you own some cyclicals with capital losses, you could take the loss now and reinvest elsewhere. But be cautious. Our ability to forecast recession is not so good. Most of the time, we don’t get a recession, even when folks are worrying about one. So I am personally hesitant to take capital gains and pay taxes just to implement investment ideas based on my forecast. And I’m a professional forecaster!
The risk of recession seems to be greater in the United States and the United Kingdom than in Asia. If you are currently under-weighted in Asian stocks, and you’re pessimistic about the U.S., this is a good time to buy overseas companies.
Let me repeat: don’t over-react. Having a good asset allocation that you stick with will help you much, much more than switching your investments from one sector to another.