Understand the Investment Clock

The clock tells you the most appropriate investment medium, considering the prevailing economic indicators such as interest rates, commodity prices and inflation. It shows that the share cycle is followed by the real estate and then the fixed interest cycles. The investment clock has proved accurate in reflecting the market forces that drive the various investment cycles. And the order in which they occur.

Looking at the clock, twelve o'clock is the boom and a rapid increase in the demand for real estate results in property prices rising. Often property prices rise by 20% per annum during these boom years.

As property purchases are primarily funded by borrowing, the increased demand for funds causes the cost of funds, that is interest rates, to rise. As interest rates rise, companies find it harder to make profits, and this together with the fact that the booming property market and fixed interest investments seem more attractive, causes share prices to fall or at least stagnate. As property prices tend to boom at these times and because interest rates rise, the rapid growth of the property market cannot be sustained for more than a few years. Property prices stagnate and even fall.

At about 3 o'clock in the investment clock, the share market is usually doing little and offers few prospects for investors and interest rates are too high to make borrowing for property an attractive option. This is the fixed interest or cash part of the cycle when cashed up investors can take advantage of the high interest rates on offer to lenders by way of bonds, debentures and cash deposits in financial institutions.

Other investors just try and battle on paying more interest on their borrowed funds.

High interest rates slow the economy and lead us into the recession.

This brings us down to six o’clock; in the depths of a recession and as mentioned Australia has a recession of varying magnitude every seven to nine years. Now investors are either too scared, or cannot afford to borrow money and in time interest rates slowly start falling. Also during these times companies are forced to become leaner and increase productivity. These measures and the slowly improving economy translate into increased company profits and this gradually stimulates share prices to recover.

We are now at about 7 o'clock. At this point in the cycle most people have left the market having sold their shares as a result of the economic downturn and retreated to cash, fixed interest or even property. Interest rates range down to historically low levels and eventually the point is reached where long term investors see value in the market and start to accumulate the better performing stocks. The seeds of the next recovery are sown and eventually equity and commodity prises will rise.

Understanding the cycle and the cyclical relationship between the share, property and fixed interest markets is critical if you want to maximise the return on your investment dollar, with the minimum of risk.

You may well ask - why do economic cycles occur in the first place? Why doesn't our market driven economy find a nice equilibrium? The simple answer is that the world economy is a collection of many nations each at their own individual point of the economic clock. And each nation is made up of millions of people each making their own financial decisions as a reaction to, or in the expectation of, other people’s decisions. The sheer momentum of all these economies means that they always over swing the mark, resulting in cyclical economic movements.

If the economic clock is well understood and the benefits of being a countercyclical investor are evident, why doesn't everyone make a killing? The simple reason is human nature. Two factors drive the share market: greed and fear. As the value of shares in the share market rises, most investors want a piece of the action and will buy more and more shares. This drives the prices up and leads to further buying. Such a market is known as a bull market. Everyone is happy, as long as the prices keep rising.

However, we know that such activity cannot continue indefinitely. The problem is that the emotion of greed is often stronger than rational thought. Conversely, when prices start falling, uncertainty sets in and most shareholders begin selling their shares before the price falls too far. As selling intensifies, share prices continue to fall. Before too long panic sets in as most investors try to divest themselves of their share holdings.

This is known as a bear market.

Although investors who keep their stocks should be able to sell them for a higher price once the next cycle comes around, the fear of loss forces many investors to sell their shares. Keeping a level head and understanding the market will give you a distinct advantage. Think how much profit you could make if you stood away from the crowd and were in a position to buy when everyone else is selling, and to sell when the pack wants to buy.

My remark:
I do not know the date of the article. The writer mentioned that the time was around 7 o'clock in the article.  It may correspond to the state of economy at the time of writing.

Source: http://www.paritech.com.au