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Understanding the Financial Markets Life Cycle


Don’t panic – Bear markets are just a normal part of the Market Life Cycle as an investor

After hitting highs in early January, both the S&P 500 and NASDAQ plunged into bear market territory, falling more than 20% to close in the first half of 2022. The drop spurred renewed interest in a The age-old question: Are we in a bear market? And if so, what does that mean for the individual investor?

A bear market is usually defined as a drop of 20% or more in an index or stock

Some bear markets are short-lived, as we experienced in 2020 with the COVID-19 lockdown, but some can be prolonged, as we saw during the Great Recession.

After a six-month slump since the start of this year, investors are trying to determine if stock prices will continue to fall or the worst is behind. Regardless, this news serves as an important reminder that stock prices aren’t just going up forever and that bear markets can present investors with new opportunities.

There is no shortage of bad news for investors in the first half of 2022

Amid supply chain problems, labor shortages, spikes in house prices and rents, and 40-year high inflation, investors have to worry about different risk factors for building a home. Build the right investment strategy.

None of us have a crystal ball to see into the future of financial markets, so it doesn’t matter that investors can’t predict the future but rather how we react to the chaos. market and build your portfolio.

Economic and financial market cycles

Behavioral finance experts tell us that investors often let emotions cloud their best judgment and drive decision-making that ultimately contradicts their long-term investment goals. them when it comes to economic cycles and financial markets.

When the market changes, the temptation is for investors to buy high, then panic and sell low. The debate over whether we’re in a recession is a popular topic on social media. However, financial markets have priced this economic contraction on equities and fixed-income securities. The real question is how long these headwinds will last.

Investors have greater access to important information about the economy and financial markets

Today, investors have access to more important information about the economy and financial markets than ever before. In addition, it has never been easier to start trading with numerous financial technology “applications” that provide easy access to trading platforms. As a result, investors are more likely to react – positively or negatively – to any changes in the market.

After nearly 13 years of market growth, many investors today may have felt invincible, buying stocks or trading options before our economy turned into a recession.

Every investment seems to be a winner and many have made money. However, the extended market cycle – and historically unprecedented monetary and fiscal policy stimulus during the COVID lockdown – has created false expectations. People think that the good times will continue for the foreseeable future.

Unfortunately, many overconfident investors bought high – just like the initiating market

“Don’t fight the Fed” is a phrase often used on Wall Street. During the height of the COVID-19 pandemic, unprecedented fiscal and monetary policies created a significant headwind for most investments.

Congress enacted legislation to put money in the hands of American companies and consumers. When the federal government provided stimulus money, the Federal Reserve had supportive policies to pump cash into the economy.

These policies extended the bull market in the early days of the pandemic, and many investors did well.

But “Don’t Fight The Fed” works both ways. First, the Federal Reserve has pivoted to restrictive policies to try to contain inflation and is now aggressively raising interest rates.

As of this writing, inflation remains at its highest level since the early 1980s, so the Fed is likely to continue using all the weapons in its arsenal to try to bring it down.

With stocks plummeting in the first half of the year, especially in most large-cap tech names, fear is driving many retail investors to sell, thereby locking in losses and limiting their ability to raise money in the long run.

A normal part of the market cycle up and down and flow

Going down after a prolonged bull market, the market’s decline from historic highs confuses most investors that these pullbacks are a normal part of the market cycle. school. No market goes up forever, and stocks will eventually have to be revalued.

That said, no one knows what will happen in the markets on a daily basis, so trying to time the markets is often a chore – and panic is not a strategy. As long as you have the right portfolio diversification based on your individual investment goals, don’t panic! Instead, sit back, relax, and let the market do its thing.

Diversify and invest in your timeline

Recession is also a normal part of the life cycle. As long as your portfolio is diversified and you’re investing over time for your specific goals, there’s no reason to panic.

Investing to achieve different goals – whether to retire comfortably in 20 years, take a vacation next year, or buy a new car within the next 5 years – can be quite simple. The key is to make sure your investment allocation is in sync with the progress for each goal. Also, focus on the long-term, diversify, and avoid products with high fee structures.

Look at your time horizon to see where you’re saving and investing. For example, if you’re years away from retirement, your retirement allocation will likely be close to 100% for stocks.

Your money should be in a diversified portfolio so you can walk away and forget about it.

The money you invest for next year’s vacation will be mostly cash and cash equivalents like certificates of deposit (CDs). However, for goals that could take several years, you should use fixed-income securities – perhaps a fixed-income exchange-traded fund.

As your target investment horizon gets longer, the stock becomes a more prominent and important part of that portfolio. But always keep in mind that if you are selling investments that support long-term goals, you are effectively closing your losses.

Diversification is key to any long-term investment strategy

Instead of having all your money in one security, it is essential to allocate investments to each goal where you are saving. You can become rich if you invest all your money in one stock, option or cryptocurrency. But for everyone on social media bragging about how much they make from a trade, such as thousands of others lose everything.

Therefore, investors need to understand the difference between investing and have a solid investment strategy versus speculation or gambling.

Do you understand the investment you are considering and why it is going higher or lower? While much of the media today focuses on short-term trading, investors must realize that this is speculation, not investment.

Long-term investing can and should be easy to understand

Taking a long-term approach to investing shouldn’t be stressful, nor should it take a lot of effort or management. But developing a long-term investment strategy isn’t the hard part – it’s sticking to that plan in the face of a volatile market environment.

As investors, we should feel content when putting our money to work for us, without stressing, panicking or constantly checking for updates.

Stay away from get-rich-quick schemes and confusing short-term speculations. As Jack Bogle once said, “investors win; speculators lose money”.

Featured image credit: Photo by Liza Summer; Bark; Thank you!

Chad Butler

Chad Butler

Chad is the President & COO of Marygold & Co. He has over 20 years of experience in card processing / program management, banking and electronic payments along with a solid business background. Chad is excited to introduce the next generation financial technology (fintech) platform to the United States to redefine expectations.

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