Chat with us, powered by LiveChat

Pay attention to business cycles to optimise your next investment

April 11, 2019 / NEWS

Pay attention to business cycles to optimise your next investment

Choosing when and where to invest your money is one of the key skills needed for successful investing. However, it can also be one of the trickiest.

Ultimately, the art of enjoying substantial returns comes down to how well you can predict the future. While predictions can be based on a number of factors, such as past experience and technical forecasting, the uncomfortable truth is that successful investing is often the product of sheer good luck.

Once we accept that the future is ultimately out of our hands, what are the steps we can take to reduce the chances of losses? Business cycle analysis is one of the options open to investors keen to base their decisions on data and logic.

So what is business cycle analysis?

Business cycle analysis is essentially focused on understanding the periodic cycles that affect businesses and economies. These cycles usually last between five and 10 years, according to the experts, and usually follow a trajectory that sees expansion, a brief peak period, subsequent regression into recession and, finally, recovery and a return to expansion. Once this return occurs, the cycle starts again.

Business cycles are a naturally occurring phenomenon, stemming from consumer habits in developed economies. The expansion stage occurs as jobs are created and new opportunities are seized, which is followed by a period of high demand for the requisite products and services within a given sector. Once the sector matures and demand is met by supply, business activity will be at its peak. Following this, a period of recession will occur, as innovation within the sector becomes less impactful and consumer spending starts to wane. The cycle starts again once a smart strategic plan comes out of the sector.

Why should investors understand the nature of business cycles?

Understanding precisely when and how growth and decline will occur in these cycles is a smart way of investing, as it helps investors gauge when to shift their money.

Savvy business cycle analysts will understand that certain sectors or commodities experience better performance at different stages of their business cycle. Understanding this is key to making reasoned decisions and knowing when to buy in.

What are the basics of business cycle analysis?

Effective business cycle analysis essentially comes down to gauging where a sector is in a cycle by looking at statistics such as Gross Domestic Product (GDP) growth, inflation, and employment. Employment, for example, is a strong indicator of sector expansion. Prolific consumer spending habits are also a good sign that certain companies or products are about to see significant growth.

Using business cycle analysis to make your next investment decision

Generally speaking, the key to smart investment is gauging which organisations will perform best at a certain time. SME stocks, for example, often perform well in the early stages of expansion. Larger organisations, on the other hand, often perform well during the mid-peak stages of their business cycle. The success of a business will also depend largely on the sector in which it operates, with certain commodities and services performing better at different stages in their cycle. Understanding the idiosyncrasies of the sector in which you are hoping to invest, then, is a good way of assuaging risk and boosting your chances of good returns.

Have you been inspired to start boosting your investment opportunities? Looking for private lenders in Australia? Get in touch with us today and we will be happy to answer any questions you may have.

Share this Article:

Not Sure On the best finance option?We love to help!
Get Started