We know that first-time investors worry too much about the timing of their investments. This is no surprise, given that starting at the wrong point in the market cycle may force you to start with big losses. But fret not – time can be on your side, too.
In this guide, we are going to delve into the cyclical nature of our economy. Dr Steven Enticott, CEO and founder of CIA tax, weighs in and explains when it’s best to make an investment. He illustrates how different asset classes tend to perform better than others at various stages of the economic cycle using what we call the Investment Clock.
What is the Investment Clock?
The Investment Clock has been around for over a century. It divides the business cycle into four phases, each of which reflects different economic realities. Ever since it was created, it has served as a guide for those looking to make a good investment decision.
How Do Different Asset Classes Perform at Each Phase of the Cycle?
Below we discuss each of the four phases in the economic cycle: slow down, recession, recover, and boom.
We start the cycle from the Boom phase, where real estate prices are flying and the market share is up. There’s plenty of money and jobs for everyone. But when everything is a bit too good, the government hits the brakes and implements certain methods to slow things down a bit.
Interest rates are pulled up to try to slow down our spending and lower asset cost prices. As a result, share prices start to drop. At this point, Enticott says, most companies in the stock exchange borrow a lot of money. Since interest rates are up, their profits will decrease.
When companies stop borrowing money, commodity prices start to drop. In addition, companies and governments who’ve been stockpiling money for a certain period of time will start spending just to keep the economy going again. Next, banks will become more hesitant to lend money for fear that investors may not be able to pay their dues. Enticott says that when the risks are too high, banks won’t lend you money. When money is tight, real estate prices collapse.
The government and reserve banks respond to such a crisis by reducing the cost of money. That means interest rates start to plummet, and people can start borrowing more money once again. Eventually, we enter a stage where share and commodity prices start to go up as a result of the increasing demand.
Finally, we return to the boom phase.
Enticott believes that our economy is currently in a hesitant and uneven recovery phase. He’s also confident that the Investment Clock will remain relevant in succeeding years. As long as the economic cycle follows the boom and bust cycle, it should prove to be a useful guide.
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