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Jul 10, 201703:55 PMOpen Mic

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7 investment fundamentals to help you make smart decisions

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Staying informed in today’s market sometimes feels like attending a three-ring circus. Between all the websites, publications, and broadcasts vying for your attention, there is a lot of rapidly changing content to take in. To make smart investment decisions, sometimes you may need to tune out the white noise and just pay attention to the following investment fundamentals that have withstood the test of time:

1) Importance of cycles: If you look at historical records, there is strong evidence to suggest cycles repeat themselves on three different frequencies.

  • Multigenerational cycles usually run over a 60-to-80-year period. Watch for political, social, and economic trends that can create four “seasons” with corresponding effects on what kind of market “weather” to expect. Demographic changes, credit availability, and technological developments can also affect the trends for each season. Because of their long duration, multigenerational cycles are most helpful when viewed as background for bull/bear cycles.
  • Secular bull and bear cycles usually run over a 16-to-18-year period. Shifts in stock valuation, in terms of absolute and relative price-to-earnings ratios, and broader sentiment are good indicators to watch. During bear cycles, many investors focus on risk management. Bull cycles are generally a good time to buy into the markets and stick with investments.
  • Cyclical bull and bear cycles usually run over a three-to-five-year period. The expansion and contraction of corporate business cycles, interest rate trends, and ranges in historical valuation within sectors are good indicators to watch. These factors may help investors determine which industries may outperform others.

2) Understand investor psychology: These boom-and-bust cycles persist despite the advancement of technology because of human nature. The fear of losing when markets are down can be as strong a motivator as the fear of missing out can be when markets are going up. Another consideration is the fact that long-term experiential memory is only about three years. How did your investment behavior and feelings change after the fallout of 2008–09? Are you back to some of your “old” habits and feelings? Let’s try not to forget those hard-earned lessons.

3) Emotions are contrary indicators: Good investing rarely feels good. Managing your emotions can be the toughest part of investing. Feeling good about your portfolio could be seen as a signal to pay attention to valuation. Trim holdings so a few outsized positions don’t drive performance, and when you are feeling stressed about a general market slump, revisit valuations of companies worthy of consideration.

4) Regression to the mean is real: Sector outperformance tends to run out of steam after about three years. It rarely has a longer run than that. The first year’s outperformance may come as a surprise. The second year, fundamentals emerge more clearly, and pull in investors. By year three, expectations are high, as are inflows, but that rising confidence sows the seed of disappointment, as well. So attempting to time sectors, like timing the market in general, is often more frustrating than it is effective in terms of long-term portfolio performance.


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