Understanding Market Cycles
Financial markets have cycles, we all know they exist, we have seen the good times where markets get over heated and it seems like the sky is the limit and hope it never ends. We have seen the bad times where the market seem to be in free fall and ask ourselves when will it end.
Most of us don’t understand what causes these cycles and the controls that the Federal Reserve has at its disposal to regulate cycles and even the role the Fed plays behind the scenes to smooth out the market cycles. In addition the United States has been and continues to have the special designation as global currency.
Then there are our emotions. Our emotions usually cloud our better judgment as to when we should be in any financial market or when we should be out. Our emotions are controlled by fear and greed. When we act on our emotions we creating a type of herd mentality where we feel like we are going to miss an opportunity. On the flip side our fear creates a type of paralysis that prevents us from taking action when markets have been beaten up.
Most retail investors get in at the market tops and get out at market bottoms. Think about the last market top. Remember condo conversions and lines of people buying over priced condos, thinking it was a good deal? We all know how this ended, right? What did we learn? Was the retail investor buying real estate after the crash, probably not, even though this was the best time to be investing? Why, most likely fear was holding us back.
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. – Warren Buffet
Bull markets keep us out. Bear markets keep us in – Unknown
Take a look at this 30-minute video produced by Ray Dalio. This is very easy to understand explanation of market cycles, the economy and the role of the Federal Reserve. There is no sales job involved here, this video is purely for your education. Ray is a very successful hedge fund manager.
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