HOW UNDERSTANDING MARKET CYCLES MAKES YOU A BETTER INVESTOR

libertynow — Wed, 02 Oct 2019 15:49:18 +0000

As with life, the market goes through cycles, both of which are beyond our control. What we can control is our response. Investors typically react opposite of their best interests-wanting to buy when markets are high and sell when markets are low. Advisors at the Global Asset Management Company in Seoul recommend three steps for overcoming our emotions vis-à-vis investment decision-making:

Learn the basics about market cycles to avoid reacting emotionally as they change
Prioritize your goals within your own life cycle and decide how much risk you can honestly afford to take financially
Establish a long-term investment plan that lays out your goals, your situation and risk tolerance. Stick to it no matter what is happening in the market

Read more about what is global asset management?

MANAGING EMOTIONS THROUGHOUT MARKET CYCLES

Economic cycles can range from two years to over a decade. Stock market cycles lead economic cycles by 6-12 months. Investors who succeed through-out repeated cycles learn to recognize the difference between what they instinctively want to do, and what they should do.

GAM (Global Asset Management) advisors report this is one of the most difficult aspects of their work. When stock prices are high, greed tempts people to buy. When markets are in a downturn and prices are low, fear leads people to want to sell. This flies in the face of common sense. Even a child is familiar with the mantra: buy low and sell high.

The best way to control one’s impulses and make objective decisions is by having a written investment plan and sticking to it. The first step in objectivity is learning about market cycles and appropriate reactions.

MARKET TOP

Markets peak after a period of strong economic growth and low interest rates. At the top, the economy is still growing but the rate of growth is slowing. Usually interest rates are falling to stimulate growth, and unemployment remains low. During this interval, corporate earnings show signs of pressure and the risk of recession rises.

The problem is that stock market gains are a buzz and in this state of elation, people want to buy even as market risk increases. This is a great time to re-balance a portfolio. Asset classes that have risen above their intended allocations should be trimmed back like hedges to their ideal shape. In doing so, the investor locks in profits and raises cash.

THE DOWNTURN

Once the market peaks, it starts to come down. Indicators that the economy is in or nearing recession include rising unemployment, falling corporate profits and downward stock market trends. The Fed will have begun rate cuts. This is the start of the bear market. At first, people will be optimistic that a correction is at hand and the bull market will continue.

Eventually reality sets in along with negative emotions leading to a temptation to sell. This stage of the market cycle requires patience. Investors should review their investment plan and ensure that all holdings contribute to achieving long- and mid-term goals. Do not panic and go to cash.

MARKET BOTTOM

Think of this period as the dark before dawn. Just like the market top, it won’t last forever. Economists define a recession as two consecutive quarters of negative economic growth, based on a country’s GDP (gross domestic product). During this time, expect falling inflation, rising unemployment, and declining corporate profits. Stock prices trend down.

Eventually, there will be a catalyst to turn things around, which is often the Federal Reserve cutting interest rates to inject liquidity into the economy, stimulating spending and leading to growth once again. This can be a depressing time for emotional investors.

But it’s the best time in the market for wise investors who trimmed their hedges at the top of the market. They have cash on hand to buy stocks at a deep discount, providing the best opportunity for long-term growth and wealth creation. This is the time to buy, not cry.

THE REBOUND

The market equivalent of a crocus peeking through the snow, this is the start of a new bull market. Economic indicators include employment upticks, low interest rates and sudden upturns in corporate profits.

To underscore the importance to investors of being fully invested at this point in the cycle, note: the year after a market bottom the S&P increases by an average of 47%. Investors who panicked and went to cash trying to time the bottom (not you, dear reader) should immediately return to their investment plans and buy diversified, good quality stocks.

Again, check your portfolio against the established investment plan and rebalance any asset allocations that are out of whack. Then sit back and relax, knowing the worst is over.

THE ROARING BULL

At this final stage in the overall cycle, the bull market is well established. Economically, statistics show strong growth, falling unemployment and increasing corporate profits. Stock prices are rising. As this cycle progresses and investors grow more confident, greed sets in and they feel invincible.

This is the time to be alert for the temptation to over-weight a portfolio with stocks, especially growth stocks and aggressive small caps. Towards the end of this cycle, market volatility intensifies and quarterly company reporting becomes less predictable, leading to both spikes and drops in stock prices.

Approaching the next market top, once again review one’s holdings against the investment plan and trim the hedges so you’ll be ready for the next fire sale.

Bottom line, understanding where we are in the market cycle and how to react appropriately is a powerful step to building long term wealth. It’s easier said than done. Advisors with Global Asset Management Company Korea report this as one of the most important aspects of their job. Being objective during difficult markets adds value to all advisor-client relationships.

Have an investment plan and stick to it. This is the key discipline in building long term wealth.

Looking for a wealth and asset management company in Korea? Give us a call.

Market Sectors & Economic Cycles

libertynow — Mon, 10 Jun 2019 11:56:16 +0000

Individual market sectors will outperform the stock market at various stages of the economic cycle. An important aspect of asset allocation and diversification is to ensure that a portfolio includes stocks that will perform well throughout the various stages of the economic, or business cycle. At Global Asset Management we employ this strategy to minimize both risk and volatility for our clients.

How Economic Cycles Affect the Markets

Economic cycles and market cycles are different. Understanding the difference and how this impacts investment performance is fundamental to establishing the optimal structure of a portfolio.

Technically speaking, the market refers to the capital markets. These include all the trading arenas for buying and selling securities, and includes stocks, bonds and derivatives, among others. Capital markets are made up of all investors: individuals, pension funds, banks, insurance companies, hedge funds and mutual funds. Collectively, their behavior influences the performance of the various capital markets. Market cycles refer to the repeated patterns of behavior of the stock markets.

The economy refers to the components of an economic system. It can refer to a national economy, a local economy or the global economy. It includes consumers, businesses, corporations, governments and financial institutions. What is happening in the economy is reflected by prevailing interest rates and statistical data like employment rates and consumer confidence, all of which can have a major impact on financial markets. However, markets often move ahead of economic indicators which is why it difficult to time the market. Bull markets usually peak ahead of the economy, and bear markets can begin during periods of economic growth. When the Fed declares a recession and lowers interest rates, this is once again bullish for the markets.

Sector Performance During Each Phase of the Business Cycle

Early-Cycle: This is when the economy is recovering from recession. At this point, monetary policy is still injecting money and liquidity into the economy and interest rates are lower. This stimulates economic growth. We see increases in company earnings and consumer spending. Sectors that do well are financials and consumer cyclicals. The bond market is strong since low interest rates are bullish for fixed income products.

Mid-Cycle: During this phase, the economy is strongest, but the rate of growth is slowing. It’s the longest phase in the business cycle. Corporate earnings peak and interest rates tend to bottom. Sectors that do well during this phase are basic materials, industrials and technology. The bond market will start to lose steam since interest rates steady themselves and the Fed may begin increases to head off inflation.

Late-Cycle: At this phase, economic growth starts to seem overheated and there may be signs of inflation which will be met with tightening measures by the Fed. P/E ratios are highest since stock prices are higher relative to earnings. Sectors that do well during this phase are consumer staples, healthcare, utilities and energy.

Recession: During a recession phase, the economy is contracting, and corporate earnings and profits are on the decline. Interest rates will have peaked and will start to fall as the Fed once again injects liquidity to stimulate the economy. The stock market will decline, either gradually or with a major correction. Consumer staples, healthcare and utilities will continue to do well during this phase. Historically, this is the shortest phase. Upticks in consumer cyclicals are the first sign that the economy has gone full circle and returning to the early-cycle phase.

CYCLES Archives » Global Asset Management Seoul Korea