For since the fathers fell asleep, all things continue as they were from the beginning of creation (II Peter 3:4b).
We recently welcomed a New Year and witnessed the Inauguration of a new president. We have also continued to see unprecedented volatility in the stock market and a dramatic downturn in the economy. All of these are examples of the cycle of activities that happen throughout our lives, some with predictable regularity and some that are more unexpected. And so the point is made: Cycles are inevitable, in life and investments.
All stock markets go through four phases: They hit bottom, they go up, they peak, they go down and then they hit bottom again. When one cycle is finished, the next begins. No one can know for certain exactly what phase we are in at any moment, but an understanding of stock market cycles is essential if you want peace of mind when it comes to your investments.
“The Bottom” occurs right after the market has dropped to cyclically low levels and stock prices have dipped a significant amount. A few people will begin to invest in stocks because prices are low and stocks can be picked up at a good discount. Overall, market sentiment begins to move from negative to neutral.
“The Rising Tide” begins when the market has been stable for awhile and is beginning to move higher as more investors jump on the bandwagon. News reports start to discuss the possibility that the worst is over, which causes more and more people to invest, while others who invested during “The Bottom” phase start selling their investments to lock in their gains.
b>”The Zenith” is the time when buyers are everywhere, just before sellers dominate and market sentiment again turns mixed. This is a very emotional time, as investors swing from complete fear of investment losses countered by periods of hope as the market at times appears to be taking off again. Prices make one last jump higher as the cycle nears the top of the phase. Those who are unable to sell for a profit settle for breaking even or a small loss.
“The Bubble Burst” is the most painful phase for those who are still invested in the stock market because it is diving toward bottom again. Many investors hang on because their investment has fallen below what they paid for it, and they refuse to let go in the hope of being rescued by rising valuations. Eventually, new investors begin buying depreciated investments and eventually the cycle repeats anew.
A cycle can last anywhere from a few weeks to a number of years. Smart investors who recognize the different phases of a market cycle not only may be able to take advantage of them to grow their portfolio, they are also less likely to get fooled into buying at the worst possible time. Perhaps most importantly, these smart investors take comfort in biblical wisdom which reminds us that life moves through cycles of relative prosperity to greater need and back again. These investors remember that God owns it all, He is in control and He will provide for all our needs.
Now, in early 2009, we are probably somewhere between “The Bottom” and “The Rising Tide.” So, what should you do? The answer to that question is a highly personal decision, and you may want to consult with your professional advisors. However, we know that volatility is still here and not going away anytime soon. If you follow biblical principles and hold a long-term view, then the money you have invested in the market now is probably money that you plan to keep in the market for three to five years, at a minimum. Historically speaking, when you factor in recessions and corrections, equities are consistently the best place to be invested in order to make money, despite upswings and downturns.
No one knows for sure the exact timing of a “bottom” or the beginning of a recovery; it is hard to know precisely when the market has reached its lowest point and has begun to turn upward. That’s why investing with a long-time horizon, diversifying your portfolio and practicing dollar cost averaging (investing in small amounts on a regular basis) is generally the best way to take advantage of the markets’ inevitable up and down cycles.
Rob West is president and principal of Trust House, Inc., a fee-only financial and investment management firm. He is also a seminar instructor for Larry Burkett’s Crown Financial Ministries and co-hosts “All Things Financial” and “Vocal Point,” weekly interactive radio programs aired on 90.3FM WAFG. He is also the Director of Training for Kingdom Advisors. For information or to book a speaking engagement, call 954-351-2088. Please send questions and comments to Rob@THAdvisors.com.The information in this article is for information purposes only and does not constitute advice. You should not rely on any information in this article to make (or refrain from making) any decision or take (or refrain from taking) any action.