Market cycles are things you can’t avoid if you invest. These happen naturally, as investor confidence rises and falls, as business runs, and as policies are made, changed or removed.
A market cycle might be the reason why the value of your investment has gone down or up, or is in the process of getting there. It isn’t something to really worry about, but it is something that you should understand.
What happens
A market cycle refers to trends or patterns that happen in a market. There may be as many cycles as there are markets, and different cycles within a market.
When a cycle happens, you’ll see certain investments giving better performance than others. This happens when their characteristics fit the conditions for growth within the cycle.
There are 4 phases to a market cycle. These are:
- Accumulation– This is when the market hits its lowest point. People who believe that things are on their way up start to invest.
- Markup– This is a period of stability in the market. Prices begin to steadily rise.
- Distribution– At this time, prices reach their high point, causing many investors to take advantage by selling.
- Downtrend– The number of investors cashing out causes prices to drop and the market to fall.
There is no set duration for a market cycle, and there is also no clearly identifiable beginning and end to one, until after it has happened.
What you can do
While market cycles are unavoidable, that doesn’t mean that there’s nothing you can do when one happens.
If you believe that you have the right knowledge and experience, you can look for just the right time to put your money in and cash out. This is called timing the market, and it is very difficult for even experts to do consistently.
If you’re a regular investor, you can instead plan to keep your money in for the long term. Since markets inevitably rise, giving enough time will allow you to recover from the dips and still come out with a profit.
