When looking to boost your portfolio, it is best to have a mix of cyclical, or offensive, and non-cyclical, or defensive stocks. A stock that is considers cyclical has its price affected by macroeconomic changes in that overall economy. These stocks are known for following the cycles of an economy through expansion, peak, recession and recovery. Non-cyclical stocks tend to beat the market regardless of economic trends or even slowdowns in the economy.
Know the Offense Cycle
Cyclical stocks belong to public companies that sell consumer discretionary items that are affected by the economy. Examples include car manufacturers, airlines, clothing retail, hotels, and restaurants. These stocks are defined by their consumer function into three categories: durables, nondurables, and services.
Durable stocks are options that involve manufacturing or distribution of physical goods that do not quickly wear out but have an expected lifespan. Think of car manufactures like Ford
Nondurables include stocks that are more fast-moving consumer goods. A good example of nondurable companies are retail stocks like Nike
Services include stocks that are separate from purchased consumer goods and include companies that facilitate travel, entertainment, and other leisure activities. These are usually the first type of companies that consumers will forego in time of economic downturns. A good example of a services company is Walt Disney Co.
Because cyclical stocks rise and fall with the economic cycle, investors can use them to predict the market. These types of stocks offer the greater potential to outperform in periods of market strength and are usually abandoned in times of recession. Investors usually add portfolio to these types of stock in the form of ETFs, which give boarder exposure. A popular ETF is the SPDR ETF Consumer Discretionary Select Sector Fund
On the other side, Non-cyclical stocks tend to beat the market regardless of the economic trend, even during downturns and slowdowns. These stocks are ofter called defensive stocks because they are able to defend their value no matter the state of the economy. These stocks usually fall more into the consumer staples and utilities sectors, which are goods and services that consumers and businesses can't do without.
A good example of a defensive stock is American Water Works
Stocks that fall into this category are essential for an investors portfolio due to the fact that an investor can still generate returns during an economic downturn.
An investor has several different options in the way they choose to apply both offensive and defensive stocks to their portfolio, but one of the easiest ways is to have a mix of each to counteract the inevitable changing business cycles. For more conservative investing, an investor should build a non-cyclical heavy portfolio that would not need to be monitored as much. For a more risky approach, an investor should load their stock portfolio with cyclical stocks when the economy is growing and unload them when the market is declining.