Understanding how investment cycles work can make your investing a whole lot more profitable. Or, at least, it can save you from being caught in the next bubble.
All investment markets move in cycles and if you could predict when boom will move to slump and then recovery you'd be rich. Sadly economists can't even predict precisely when this will happen. There are so many factors involved and human sentiment throws in a wildcard. Whoever would have thought that something called CDOs could have thrown the world's economies into turmoil before it happened? What's more, economic cycles and stock markets aren't like synchronised swimmers. The stock market tents to move in advance of the economy – predicting what's going to happen.
It's surprising how often investors manage to forget that markets are cyclical. It's most obvious at the moment in the residential property market where some investors are in shock – or even mourning for the phase of the cycle that made them rich. If I had a dollar for the number of times I heard investors saying that the market would just level out and it would never crash I'd be a very happy woman.
Ditto for the technology markets of the late 1990s. At the time I was living in London and got sick of hearing that we were living in a "new paradigm" in which fundamentals no longer mattered. Needless to say, the cycle came back to bite those blinkered investors.
Certain sectors do better in different phases of the cycle rotation. For example it may not be a great time right now to be investing in consumer cyclicals, however food and power is consumed in recessions as well as boom times – giving an indication of good sectors to be in. Just to be difficult I should throw into the mix that contrarian investors may say that now is the time to be buying consumer cyclicals because no-one else is and prices are depressed.
Some shares are more cyclical than others. Those that aren't as cyclical – that is affected by the cycles of the economy –such as utility companies – are often called defensive stocks.
To watch videos about cyclical stocks and how they work click on this link.
Video: How to Predict Bull and Bear Stock Market Cycles
The property market cycle affects virtually all of us whether we're owners, investors, or tenants. Property market analyst Kieran Trass describes the property market cycle as a clock. At 12pm it's boom time and 6pm is slump. At some point around 7pm a recovery will start. Because the majority of residential property is owner occupied, total bust is unlikely – because owners simply hang on until price growth returns.
Video: Property investment - predicting hot spots
History shows us that property market cycles tend to take 7-10 years to go round. After one of the biggest booms in recorded history over the past few years this one could take longer to come around. It requires that the fundamentals of the relationship between wages and prices and property yields on investment properties come back into kilter – which they haven't so far.
Property investors are very excited at the moment that they're getting cash-flow positive property again. But in reality it's only cashflow positive because home loan rates are historically low.
According to the April figures on QVInsider.co.nz the average gross yield for residential property in this country is 4.9%. There's no mortgage available that I'm aware of low enough to make that profitable. So the cycle has a way to go.
Do you have informtaion about investing cycles?
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