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One of the questions I get asked regularly is when is the best time to invest, which correctly implies that there are both good and bad times to invest in a stock or market. While to me there is never really a bad time to invest in quality assets that are rising in value, there are certainly times that are better to invest.
All markets, not just share markets, run in cycles from low to high to low, and quite simply, all cycles are dictated by the human emotions of fear and greed. Economic cycles, business cycles, share market cycles and property market cycles are all influenced by human behaviour. Here the basic laws of supply and demand dictate the rise and fall of prices, and these laws relate just as much to an investment as they do to any business.
Let’s face it: when you want to buy a property or shares you do not want lots of demand (competition) and when you want to sell. But how do you know when demand is most likely to rise and when will it most likely fall? The answer is in knowing the cycles.
In the share market we have cycles lasting from minutes within a day to centuries, with the ones of more interest being:
The trader cycle: 16 to 26 weeks
Active investor cycle: 48 to 60 months
Investor cycle 105 months (9 years)
Longer cycles in the Australian share market are 18, 40 and 80 years.
I have been told many times by industry experts that you cannot time the market, yet a study of market cycles proves that actually you can. That said, the study of cycles is only probability as many things can affect how a cycle unfolds, and as such, cycles tend to ebb and flow in both time and in price.
The exact timing of a high or low of a market is not something that is consistently predictable by even the best experts, but the study of cycles allows investors and traders to determine the likely direction of a stock or market and when that direction may change so that they can buy “at the right time”. So while you may not be able to determine the exact day or week of a move, if you are prepared you can time your entry and exit to and from a market with relative accuracy.
It is well known that our market has a rough four- to five-year cycle and that when our market falls into these cycle lows, that a fall of 15 to 20% is not out of the ordinary, and with larger cycles like the 18- or 40-year cycles the fall is closer to 50%. This information is vital to achieve above average returns over the longer term, as investors can enter into the market at times when it is low and exit at times when it is high.
Ignoring the fact that the markets unfold in cycles only increases portfolio volatility and reduces capital gains. Given that our market achieved a major low in March 2009, all any investor need do is consider that March 2013 will mark four years from 2009 and so decisions can be made by investors as to what action they will take prior to and after the market falls into its cycle low.
In bull markets the cycle high occurs about two-thirds or three-quarters of the way through the cycle, whereas in a bear market the opposite is correct. Smart investors stop entering the market in the last third of the bullish cycle and wait for the decline to exit early and re-enter after the bottom of the cycle, and in doing so take advantage of a law of compounding.
Given where we are in our current cycle, investors should be taking advantage of the last major rise in our four-year cycle, as the next four-year low could reasonably be expected sometime in the next 12 months. My tips to discovering cycles are to go online and look at a monthly bar chart of the market or stock you are interested in, being careful to show the longest length of time you can on the chart. You will see major lows separated by a similar amount of time such as four years repeating on the chart.
Below are two links to information I have provided to the ASX. The first link is an article published earlier this year which talks about cycles, especially the 40-year cycle. The second link takes you through to a video of an ASX investor seminar I did last year and it too talks about cycles and how they unfold. Both are aimed at the investor market and explain things in a very simple manner.