Don?t let economy?s fluctuations drive portfolio

You may have heard a lot of talk lately about the "R" word recession. But economists and other observers often disagree whether the economy is in a recession.

When the economy slows down, parts of it may be hurting, but a slowdown is not a recession.

During a true recession, the economy declines it doesn't grow slowly. In a sense, the economy is like a car.

During a slowdown, the car is still moving forward, although very slowly. But during a recession, the car is going in reverse.

Definition of recession

Technically, a recession occurs when real gross domestic product the total inflation-adjusted value of goods and services produced in the United States declines for at least two consecutive quarters.

Unfortunately, the public often applies the term recession to any weak period of economic activity. In addition, many investors perceive the stock market as being an indicator of economic growth or recession, a perception that is not always correct.

Not all market declines lead to a recession, because the market does not perfectly represent all sectors of the economy and the activity that occurs in those sectors.

Cyclical economy

The truth is that the U.S. economy is cyclical, meaning that it moves through stages of growth and recession varying in duration.

A mistake made by many investors is that they buy and sell securities based on fluctuations of the economy and the stock market.

The best way to help ensure your portfolio weathers the ups and downs of economic and market cycles is to diversify among several different types of investments typically stocks, bonds and cash depending on how much risk you are comfortable taking.

Within each of these types of investments it is also recommended to diversify further.

For example, you may want to consider purchasing a mixture of large-company and small-company stocks. It's also a good idea to own a variety of different types of companies representing different parts of an economy such as manufacturing, consumer products and technology, to name just a few.

Bond investing

The same can be said for investing in bonds: you should own different types of bonds government and corporate issues for example that aim to return your original investment in different time frames.

The idea is to prevent you from having all your eggs in one basket, which can help smooth out your potential investment returns over the long term.

Additionally, most successful investors take a long-term view at least three to five years rather than expecting stellar returns overnight by jumping on the latest investment bandwagon.

Finally, when you assume a long-term in-vestment strategy, you have the opportunity to participate in dollar-cost averaging.

This strategy entails purchasing the same dollar amount of securities at regular intervals, al-lowing you to buy fewer shares of a security when prices are high and more shares when prices are low.

A winning approach

Keep in mind that dollar-cost averaging does not assure a profit and does not protect against losses in declining markets.

Because this plan involves continuous investments regardless of fluctuating prices, you should consider your financial liability to continue purchases through periods of low price levels.

A long-term, diversified investment strategy based on your investment goals and risk tolerance can create a winning approach for you, regardless of whether the economy is fully revved, stalled or in reverse.

(The preceding article was provided by Timothy M. Reese, vice president of investments with A.G. Edwards & Sons, member SIPC.)