There is a saying that what goes up must come down. The corollary is what comes down must go up. This is what cycles are about and there are cycles in investing. The main problem is that we have very short memories. The Global Financial Crisis saw the share markets collapse in two stages in 2007 and 2008. When this happened no commentator was able to say ” I told you so” as not one person predicted that the cycle would go down. Nine years later a few liars have dared to say that they did predict it.
We have now moved on nine years and again since July the market has gone down. If you joined the world of investing since the last down turn it is not surprising that you have no idea about cycles. These newbies are thus fair game for experienced investors. It is always useful to look back and see if there are lessons to be learnt from the past.
The Property Cycle
Property also runs in cycles. However the cycles tend to be at different intervals to the share market. In 2003 the property market stopped going up but then the share market started to go up. So many people switched investments. However in 2015 both the share market and the residential property market peaked. This leaves investing decisions in no man’s land. There are really only three investment classes: lending money to someone usually a bank as one wants to be certain that one gets repaid; property which can be residential, commercial or industrial and can also be in the form of property trusts; and in businesses which can be one’s own or other peoples which is usually done via the stock market. This has been expressed as investing in a business as that is what you are doing if you buy shares, you are investing in a bank, a miner of red dirt or a retailer. One only needs to look at Dick Smith or Woolworths to see how management was not making the correct business decisions or you can look at BHP and RIO to see what an over-supply of iron ore has done to prices and thus companies’ profits. Other investment advisors dream up many other classes (part of the jargon of investing to impress/confuse clients).
The conclusion to this discussion is that you just at times have to sit on your hands and wait. Us
humans are not very good at that as we like to be active. Remember there is no point in getting a
return of 6% on your investment if the value drops by 10%. Previous downturns have had drops of
figures like 40%.