Investors go through nine market cycles throughout their lifetime, Russell research shows

Wednesday 29th July 2015

An investor is likely to go through nine market upturns and downturns over their lifetime, according to research into market cycles by global asset management firm Russell Investments.

Since 1926, the US stockmarket has gone through 16 market cycles, each of which has gone through the same stages – from euphoria to despondency. Despite the emotional journey for investors, the point of maximum financial risk is when the market hits euphoria at the peak of the cycle and, conversely, the point of financial opportunity is when it’s at the nadir and people are most despondent, Tim Noonan, managing director of Russell’s capital market insights in the US, told the NZ Investment Summit in Auckland on Tuesday.

The world is presently going through a difficult market recovery, but investors won't know it's complete until the US Federal Reserve and other central banks start lifting interest rates, Noonan said. Although market cycles are a given fact of trading, no two are the same and most people fail to understand them properly.

“You can’t predict a future cycle on the basis of a previous one,” he said. “There are three phases that exist in every cycle – the downturn from the market peak, the recovery, and then expansion beyond the previous market peak. Every cycle can vary markedly in duration and magnitude,” he said.

Typically downturns have lasted 13 months, recovery 25 months, and expansion 31 months but the last two cycles have been deeper and longer than before, he said.

The best way for investors to ride out market cycles is to have a long-term focus on value-based investing rather than an intra-cycle focus based on following market sentiment, he said.

Following widespread debate over the problem of short-termism in financial markets, the Sydney based Centre for International Finance and Regulation (CIFR) researched how institutional investors might adopt a long-term approach. The research included discussions with New Zealand and Australian superannuation funds.

Dr Geoff Warren, a research director for CIFR, told the conference long term investing and having a set timeframe to get your money out do not go together.

There are three broad advantages to getting rid of time pressures around investment decisions, he said. Long-term investors can focus on whether, rather than when, a particular investment return will actually be achieved, which allows them to chase opportunities that others with short horizons won’t consider.

Another advantage is being able to exploit opportunities arising from the actions of short term investors, such as premiums associated with risks short term investors won’t take on. An example would be investing in property when the market hits the bottom because long term investors can ride out the cycle.

The third advantage is that long term investors can typically take on a wider range of investments, including more illiquid and unlisted assets which offer exposure to returns not available on listed markets, Warren said.

But the pitfalls include making the wrong predictions about what the long term holds, which can mean money being tied up in an investment that underperforms for an extended period before the mistake is recognised.

It can also be hard to stay the course under a long term investment approach when external managers may focus on short term performance, and when employees’ bonuses and incentives are based on that too.

Warren said solutions include aligning the organisational structure to set the right incentives for a long term investment approach, building a culture led from the top with a clear objective to add value over time rather than respond to market volatility, and communicating to all stakeholders what the long term objectives are with each investment rather than monitoring by the numbers.

BusinessDesk.co.nz

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