What Goes Around Comes Around

What are economic cycles and how do they affect me?

One of the frequent themes that impacts upon the tactics and longer term strategy when investing, is identifying where we are in the economic cycle. Despite the turmoil and in some instances, capitulation over recent years, the economic cycles are a known and lucid part of financial understanding that, if properly understood, can ensure that our sails are set effectively to benefit from whatever stage of the economic cycle we find ourselves in.

When I refer to investing, I am not talking about speculation. The two are not the same. Speculation is not the business that we operate in at Loughtons.

The economic cycle can be broadly split into 4 main themes:

Determining where we are in the economic cycle can determine whether we should hold more in one asset class (cash, commercial property, fixed interest securities or bonds, equities or shares) or another and within each part of the economic cycle, different types of the same asset class could perform better depending upon these and other factors (equity income or growth shares).

My experience is that investors are sometimes ruled by their emotions and cannot see that investing is cyclical much like the seasons. I often liken a recession to a detox of the economy. Washing out all of the excesses that have resulted in a slowdown in the first place. However, it is this very process that will determine the foundations for the next positive cycle within the economy.

Some of these emotions may be expressed as follows:

So why don’t I just invest during the positive elements of the economic cycle?

Markets are incredibly fast and my experience leads me to believe that you cannot predict when we have moved to the next part of the cycle until we are well into it, so it is my view that you cannot predict this. However, what we can normally predict is the next phase of the economic cycle.

To properly understand economic cycles and how these impact upon investment returns, we need to understand the underlying drivers of economic growth or decline and spot these early enough. If they persist, then we will later see the results of that persistence in the real economy – e.g. our streets, villages, towns and cities.

But it can take 12 to 18 months for an underlying economic theme to begin to appear in our high streets. In the meantime, stock markets have already priced this information in months earlier, so buying in at this point, where prices have already risen, many not actually be as beneficial had the investor bought into the market 12 to 18 months earlier, when prices on entry to a market were much lower.

Therefore, understanding how economic cycles affect our tactics and strategy is where Loughtons add value. We have a developed understanding of these matters and can identify key factors that should be taken into consideration when investing funds or reviewing existing investments.

For advice on how economic cycles may affect your own financial planning decisions please contact us on 01626 833225.

Please note that the above article does not constitute financial advice.