By iA Private Wealth, October 25, 2022
What’s a market cycle?
Over a period of time and based on prevailing economic conditions (among other factors), markets go through distinct phases. The four main phases are accumulation, mark-up, distribution and decline.
Investors and the market cycle
Given these different phases, how should people invest? It helps to acknowledge that the duration of each phase will vary, but generally market analysts can only define and “time-stamp” phases after the fact, once data has been studied.
Understanding bulls and bears
Markets are prone to rise and fall – that’s just the way they react to macroeconomic and geopolitical circumstances. When the market rises 20% above its recent low levels, it’s commonly referred to as a “bull market.” When the market declines 20% below recent high levels, it’s known as a “bear market.”
Although both market types are inevitable, historically the long-term trend has been to move higher. In fact, according to data from Bloomberg as at December 31, 2021, the average bull market lasts about 78 months and generates an average return of 193% over that period. Meanwhile, the duration of the average bear market is only about 11 months, and the average return is -32%.
Armed with this knowledge, most long-term investors are best served by recognizing stock market cyclicality but not jumping in and out. If your timing isn’t perfect – and that’s a safe assumption unless you own a crystal ball – you risk selling when stock prices are still rising, and buying when stocks are declining.
Benefits of staying the course
It requires discipline to remain invested through the down phases of a market cycle, just like it does to resist the temptation to be greedy when you think stocks have nowhere to go but upwards. However, sticking to your investment strategy is a proven way to build long-term wealth. An Investment Advisor can help you stay true to your wealth plan and keep emotions out of investing. A good advisor has the skill and experience needed to guide you through the market cycle so you can ignore short-term “noise” and focus on the future with confidence.This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.