Understanding market cycles and why staying invested matters.

Investing in financial markets can feel like riding a roller coaster, periods of growth followed by downturns, then recovery and expansion again. These fluctuations are known as market cycles and understanding them is key to making informed investment decisions. More importantly, history shows that staying invested through these cycles often leads to better long-term outcomes than trying to time the market. 

What are market cycles?

A market cycle refers to the natural rise and fall of markets over time. While the length and intensity of each cycle will vary, they generally consist of four phases:

1. Accumulation phase – Occurs after a market downturn when valuations are low. Smart money and long-term investors begin buying assets.
2. Markup phase - Confidence returns, economic indicators improve, and prices rise. Retail investors often enter during this phase.
3. Distribution phase - Market reaches a peak; valuations are high. Experienced investors start taking profits.
4. Decline phase - Prices fall due to economic slowdown or negative sentiment. Often accompanied by fear and panic selling.

Why timing the market is risky

Many investors try to 'time the market', selling before a downturn and buying before a recovery. While this sounds logical, it’s extremely difficult to execute consistently. Missing just a few of the best performing days can significantly impact returns.

Looking at analysis from investment manager Hymans Robertson Investment Services (HRIS), and how an investor’s outcome would have changed, depending on three different scenarios. These being had the investor remained invested, disinvested into cash, and also had they disinvested but then reinvested at a later point. The data showed that had the investor stayed invested, they could have seen an extra 50% in the value of their investment holdings. 

The power of staying invested

Here’s why remaining in the market often beats jumping in and out:

• Markets recover over time: Every major downturn, whether the dot-com crash, the 2008 financial crisis, or the COVID-19 dip, has eventually been followed by recovery and new highs.
• Compounding works best when uninterrupted: The longer your money stays invested, the more it benefits from compounding returns, especially if you are making regular contributions into the investment. 
• Emotional decisions hurt performance: Fear and greed often lead to selling low and buying high, the opposite of what successful investing requires.

Strategies for staying the course

• Diversification: Spread investments across asset classes to reduce risk.
• Regular reviews, not knee-jerk reactions: Adjust your portfolio based on long-term goals, not short-term market noise.
• Use pound-cost averaging: Invest a fixed amount regularly to smooth out market volatility.
• Focus on time in the market, not timing the market: History favours patience and discipline over prediction.

Final thoughts

Market cycles are inevitable, but they don’t have to derail your financial goals. By understanding these cycles and resisting the urge to time the market, you should position yourself for the longer term. 

It’s not about predicting the next move, it’s about staying invested for the journey.

If you wish to explore this article in more detail, then please get in touch for a free initial consultation. 

Disclaimer: This article does not constitute financial advice, and you should always seek advice from a regulated financial adviser before making any financial decisions.