Everything In Life Moves In Cycles
by Milad Taghehchian, CFP(R) on January 14th, 2014

We as human beings have done a great job of recognizing and using natural cycles to our benefit. We know that after the amazing bounty of Spring we have the lag and droughts of Summers followed by the graying and stagnation of Winter. More importantly we have learned that while some things do well in the Spring others only thrive in Winter.

These same principles should be applied to your investment portfolio. We know there is a cycle to the economy. We know when the economy is very strong people tend to rush in and push prices higher than they should. This will always lead to a crash in prices. When things are going down we tend to push them lower than their natural value. This period is identified by fear and panic selling of decent assets after which point things start to pick up again.

However, it is important to recognize that when one asset such as the US Stock Market is in its winter, another asset such as Real Estate may be in its Spring. Many try to predict asset cycles, but most fail. The way to take advantage of these natural swings is to own the asset classes that have varying cycles. You want some US Stocks, some Non-US Stocks, US Bonds, Non US Bonds, Commodities, Real Estate, Basic Materials, etc. All of these investments move in varying directions for a variety of reasons. You want to know that when your spinach is not growing, your tomatoes may be doing well.
*image courtesy of  www.dividendtree.net

This matrix illustrates the correlation among various asset classes. The closer the number is to +1 the more highly correlated the performances are. Near 0 means no real correlation. The closer we get to -1 the more near complete opposite performance we achieve

Posted in College Education, Investments, Retirement    Tagged with investing


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