Rally may mean time to adjust your portfolio

updated 2:11 p.m. ET April 19, 2009

CHICAGO - It's a truism from Investing 101. When the economy is bad, seek refuge in stocks of companies that offer stuff people don't cut back on: deodorant, toilet paper, health care and the like.

Such stocks have in fact widely outperformed the market during Wall Street's nosedive, even though they proved far from immune from damage.

But now it may be time to consider playing less defense within your portfolio.

Certainly a more aggressive approach would have paid off in recent weeks.

After hitting a nearly 12-year low on March 9, the Standard & Poor's 500 index rocketed up 27 percent in a month, led by technology and financial stocks. That was more than double the 12 percent gain of the Consumer Staples Select Sector, an exchange-traded fund which invests in such typically defensive consumer stocks as Procter & Gamble Co., Coca-Cola Inc. and Colgate-Palmolive Co.

Does that mean it's time to ditch the focus on recession-resistant stocks, or is it better to remain cautious until employment begins to level off and there are clearer signs of whether the stimulus is taking effect?

When assessing whether you're ready to introduce more risk, it's important to understand how the market performs historically. For instance, because defensive stocks generally underperform in a recovery, investors who either sit tight with conservative portfolios or tiptoe back into the market by buying "safe" stocks might be making the wrong moves.

"There's a danger (with safe moves) from the standpoint that you could buy stocks that don't catch most of the rebound," said David Goerz, chief investment officer of HighMark Capital Management in San Francisco. "If you don't consistently rebalance, you miss out on the recovery and you can actually end up well behind as we come out of this."

In order to best position yourself to participate in a stock recovery, it's better to buy cyclical stocks like tech, manufacturing and other industries that rely on economic growth as the global recession moves closer to an end.

Barclays Wealth, the wealth management arm of British bank Barclays, recently began recommending that clients begin dialing up risk accordingly.

"Our basic advice is be defensive by having more bonds or more cash and use your small stock portfolio to play offense," said Aaron Gurwitz, the firm's New York-based head of global investment strategy. He recommended going light on consumer staples and other defensive stocks while looking more for ETFs and stocks likelier to benefit from a recovery.

But others believe it's too early to make more aggressive moves. After all, while some economists have publicly predicted the recession will end in the third quarter, the economy remains vulnerable and a return to boom times is nowhere on the horizon.

While they won't lead the pack in a recovery, Tom McManus, chief investment officer of St. Louis-based Wachovia Securities, thinks consumer staples and health care companies with strong balance sheets are still sound buys at current market prices.

MORE FROM PERSONAL FINANCE

Personal finance Section Front

Some financial lessons for recent graduates Couples don’t talk about their financial future Cutting back? You may find cash in your closet The Big Money: Credit card reform Disney exhibit teaches kids financial lessons 5 costs of buying a home you didn't consider The Big Money: The personal finance myth Banks getting stress tests, so why not you? ConsumerMan: Your credit score Mortgage aid program will likely help millions Personal finance Section Front   Add Personal finance headlines to your news reader: