Joe Duarte Today's broad selection of different types of mutual funds allows traders to allocate assets based on personal expectations of changes in the stock market, interest rates and currencies. Asset allocation has become a popular investment strategy. In this strategy, capital is usually divided into stocks, bonds and cash, and capital is transferred from one category to another based on whichever trading method the portfolio manager favors, technical or otherwise. During periods of economic retrenchment, however, asset allocation models may have low returns because portfolio managers choose to increase their portfolios' cash positions because they fear falling stock prices.
Recessions usually lead to lower interest rates, reducing a portfolio's cash portion return.
Often, during periods of economic weakness technical conditions favor taking the increased risk of long-term bonds and foreign currencies to enhance the return on the cash portion of the asset allocation portfolio. Here's a review of the variables involved. Falling bond prices lead to higher bond yields. These rising interest rates make a country's currency more attractive to traders. In our global fiat monetary system, a government's promise to make its currency legal tender provides that currency's sole backing.