The international monetary found has stated that there is going to be a recession in the 90% of the countries as a result of the commercial war between USA and China, and the Brexit. It seems that the most important countries are 'closing borders' with regards to the market (by imposing duties/tariffs).

What are the arguments for adopting a more defensive investment strategy, such as investing a bigger part of your money in AAA bonds instead of stocks? What are the arguments for doing the opposite?

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    Who cares what the IMF thinks? Why is a bond defensive in a recession? Who issued the AAA rating, why do you trust it? – quid Oct 8 '19 at 17:31

Don't time the market

Every time there's some risk that could cause stocks to halve (or lose more of) their value. Most of the time, it won't happen. I'm sure you won't find any period where negative news don't exist. You just need to learn to ignore negative news.

Instead, invest as much into stocks as you are comfortable

Stocks yield more than bonds. In the long run, the yield is certain to be more. In the short run, bonds may temporarily outperform stocks. For example, in 30 years in the worst case stocks yield 8% per year then fall by 80% due to a market crash, or 1.0830*0.2 = 2.0125 times. Where I live, AAA bonds have a slightly negative yield. Actually, even for 20 years stocks yield 1.0820*0.2 = 0.93219 times in the worst case, and bond yield is -0.179% per year or (1-0.00179)20 = 0.96480. So, bit over 20 years and you are almost guaranteed to outperform bonds in the current market situation.

Note the 80% crash is the worst case scenario, taken from the Great Depression effect on stock prices. It happened only if you invested all your money immediately into stocks at the highest price, then withdrawed your money approximately at the worst possible moment.

I would say if your time horizon is less than 20 years, and you don't like losing much money, some percentage of AAA bonds in your portfolio could be a good idea if they have a positive yield. (If they have a negative yield and you have the possibility to store your money in a bank account with zero yield, use the bank account instead!)

For example, for retirement savings your horizon is likely over 20 years unless you plan to retire very shortly or you have a fatal disease causing you to die at an early age. For saving for a newborn child, your horizon is likely over 20 years too.

For saving towards a short-term target like purchasing a house (hint: don't spend a lot of money to purchase an expensive house!) you probably want to include lot of AAA bonds in your portfolio.

Diversify away your risk

Some stocks benefit from the trade war, some are negatively affected by the trade war. On the average, the trade war probably has a slightly negative effect. If you diversify your stock holdings, you won't have only those stocks that lose a lot of value due to the trade war.

Remember your trading fees

Every time you trade stocks, you lose and the stock broker wins. Don't trade unnecessarily!

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  • Agree with all of this-- if the market crashes that's just a good time to pick up stocks on sale. The 2008 financial crisis saw a 55% loss of equity from the peak to the trough, but 5 years after that the market was up 164% from its lowest point. After 10 years it was up 293% (not including dividends). The market always goes up eventually. – Dugan Oct 8 '19 at 18:01
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    Don't time the market is said by people with no clue how to manage risk (see down 50% in 2000 and 2008). You can't diversify away risk. Look back at 2008 data and see how the so called safe defensive sectors performed. It a great conversation to tell the wife over dinner, "Honey, I diversified into the Consumer Staples SPDR and we only lost 31% of the value of our portfolio. It lost less than all of the other sector SPDRs!". Lose 50% and you need the market to double to break even (ignoring dividend reinvestment compounding). You might consider learning to react to the negative news. – Bob Baerker Oct 8 '19 at 18:20

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