Profitable investing comes from picking the right asset classes to invest in and handling your investments in such a way as to avoid losing money, instead of gaining profits. The value of an investment comes from its expected future returns. This expected future ROI is what intrinsic value is based on. And, as the economy rises and falls, so do the value of investments. What investors are willing to pay for an investment rises and falls with market sentiment. Thus the economy and the perceptions of other investors help drive an investment cycle. The best time to invest is at the start of the investment cycle and the best time, obviously, to take profits is before the end. But, how can you profitably time and investment cycle?
Can You Profitably Time an Investment Cycle: The 4 Phases
An investment cycle has four parts:
The accumulation part is in the late stages of a substantial market correction or crash. Many investors are throwing in the towel. But, this is when the smart money enters or re-enters the stock, bond, and real estate markets. Can you profitably time an investment cycle by purchasing at this time? The key to success at this point is to be sure that the market has bottomed out. At this time competent intrinsic value calculations will indicate what investments to buy.
The start of the mark-phase of the investment cycle is when many investors get confused. Unemployment is worsening but many stocks are going up in price. This is because the market discounts what it believes will happen. The prices of stocks and other investments have already bottomed out. Smart investors are cherry picking the best opportunities and starting to see gains.
The mark-up phase becomes self-perpetuating as more and more investors re-enter the market and prices get bid up across the board. This is when the rising tide raises all ships. Unfortunately, late-entering investors expect to see the same profits continue and they bid up prices beyond what fundamentals will support. Can you profitably time an investment cycle at this point? Again, you should rely on intrinsic value, as some companies will still be making money and are good long term investments, while others will be due for a fall.
The distribution phase of the investment cycle is when the folks who bought in phase one and early in phase two start to take their profits. There are as more sellers than buyers. Prices become volatile. Those who successfully anticipate the swings of the market will profit and those who do not will sustain losses. Can you successfully time an investment cycle at this point? Yes, you can. You can start to take profits and adjust your portfolio to a more defensive posture.
The mark-down phase of the investment cycle is when prices are in steady decline. This can be gradual or it can be precipitous, when driven by an economic recession, social unrest, or war. Depending on whether or not you are still invested at this point, the question will be if you can hold on until the cycle starts again after the markets have bottomed out. The key factor at this point is the quality of the investment you have. If you own investments that are likely to weather the storm and even come out stronger on the other side, you might as well hold on. If you entered the market late and purchased junk, you might as well sell for pennies on the dollar before your investment is worthless.