What it is
A business cycle, also called an economic cycle, is the natural rise and fall of economic activity over time. There are 4 main stages in the cycle: expansion, peak, contraction, and trough.
Expansion marks a period of steady growth that leads to the highest level or the peak. After that, economic activity enters contraction, slowing down until it reaches its lowest point or the trough.
The end of the last phase also marks the start of the next expansion.
What it means for you
Understanding the business cycle can give you an idea of how the economy works and the factors that may lead to its growth or decline. You may also see connections between the phases and investment performance.
For example, during periods of economic growth, people generally have more disposable income. They may spend more on things like consumer goods, technology, or travel.
The growing demand may boost investor interest in stocks or other assets tied to those businesses and industries.
On the other hand, if the economy steadily contracts and enters a recession, investors may adopt a more conservative view and place their money somewhere safer, like bonds or safe haven assets.
Learning about the different phases can help you make informed investing decisions. However, it can be impossible to predict when each phase will start and end, or how specific investments may perform during these fluctuations.
The best that you can do is to be ready to ride out the changes. You can prepare by strengthening your portfolio and keeping risks manageable.
