Invest in a variable economic environment

Wise investments mean good money spread. Smart investors benefit from the good times and limit the damage in bad times. Although that spread must be regularly adjusted.

Business cycle

Spreading money can take many forms. For example, investors can take the business cycle into account. There are sectors that are doing difficult when the economy isn’t doing great. Think about automakers, hotel companies or manufacturers of luxury goods. For other sectors the impact is less, such as food companies, diamond traders, insurers and pharmaceutical manufacturers. After all, they provide goods and services whereon people can’t or won’t save. Companies that thrive in bad times are rare, but they exist. An example is outplacement companies that receive compensation to assist redundant workers to new jobs or – with a more positive approach –diamond traders, since the value of diamond is less sensitive to business cycles.

Predictions

It seems a logical conclusion that it is wise to invest in non-cyclical companies and sectors during bad times and change to cyclical shares in good times. Unfortunately, it is not that easy. ‘The stock market has predicted nine of the last five recessions’, said the legendary economist Paul Samuelson. We can say the same for revivals of the economy.

It is impossible to predict with certainty whether a prolonged period of glory arrives on the stock market or that there is only a temporary revival before an even deeper fall. It is easy to analyze in retrospect as the period is over. So many investors realized afterwards that they invest too early in the raw materials sector in 2015.

Unexpected circumstances

The distribution also changes with time depending on the need. A bachelor with no real future can be a happy faithful father-to-be within three years. With large expenditures in prospect, defensive investing might be more appropriate.

A similar consideration applies to different generations. The portfolios of young people have plenty of time to recover from a stock market correction, while it is more difficult for the older generations. A good rule of thumb to calculate the correct rate risk of a portfolio is one hundred minus the age of the investor.

Fundamental error

There is another important dimension, namely diversification over time. By investing money in the stock market at regular intervals, an investor buys when stocks are cheap and expensive. Many investors, who got into the stock market in 2007 and left again discouraged in 2009, have therefore made a fundamental error. Our natural instincts are the worst counselors when it comes to the timing of investment. It is important to not panic when stock prices fall deeply, as it is typical for investments. Invest with a long-term look.

Author: San Meuleman

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