STOCK MARKET

Understanding The Stock Market Cycle

The winning investor should understand how a normal business cycle unfolds and the duration of these periods, paying particular attention to recent cycles. There is no foolproof guarantee that stock market cycles will last three or four years because it happened that way in the past.The stock market ordinarily bottoms out while business is still on a downtrend, anticipating economic events months in advance. Analysts refer to this phenomenon as "discounting of the future."

In like manner, bull markets frequently top out and turn down before economic recession begins.Therefore, using economic indicators to tell you when to buy or sell the stock market is generally an exceedingly poor procedure. Yet some firms have people trying to do this very thing. It's a somewhat ridiculous approach, but it does seem to make those who don't understand the stock market very well feel better. Ironically, economists also have a rather faulty record of predicting the economy.

A few of our U.S. presidents, themselves lacking sufficient understanding of the American economy, have had to learn this lesson the slow, hard way. Around the beginning of 1983, just as the economy was in its first few months of recovery, the head of President Reagan's Council of Economic Advisors was a little concerned because the capital goods sector was not very strong. This was the first possible hint that this particular advisor might not be as thoroughly sound as he should be, because capital goods demand is never good at the early stage of economic recovery, and particularly so in the first quarter of 1983, when American plants were operating at a low percentage of capacity.

You should check earlier cycles to learn the sequence of industry group moves at various stages of the market. For example, railroad equipment, machinery, and other capital goods industries are late movers in a business or stock market cycle. This knowledge can help you determine what stage of the current market period you are in. When these groups start running up, you know you're near the tail end.Almost always, the really big money is made in the first one or two years of a normal new bull market's upward movement.

This, then, is the point in time you must recognize as soon as possible and fully capitalize upon while the golden opportunity is there.The remainder of the up cycle usually consists of back and forth movement in the market averages, followed by a bear market. The year 1965 was one of the few exceptions, but this strong market in the third year of a new cycle was caused by the advent of the Vietnam war.

MUTUAL FUNDS

Mutual Funds Investment Tips
Pick a diversified domestic growth fund that performed in the top quartile of all mutual funds over the last three to five years. It will probably have averaged an annual rate of return of about 20%. The fund should also have a better-than-average record in the latest 12 months when compared to other domestic growth stock funds.Steer away from funds that concentrate in only one industry or one area like energy, electronics, or gold. The investment company you pick does not have to be in the top three or four in performance each year to give you an excellent profit over 10 to 15 years.The fund can be either a no-load, with no commission, or load, or one where a sales commission is charged. If you buy a fund with a sales charge, discounts are offered according to the amount you invest and some funds have back-end loads which you may want to check. The commission paid is substantially less than the mark-up you pay to buy insurance, a new car, a suit of clothes, or your groceries. You can also sign a letter of intent, which will allow a lower sales charge to apply to any quantity purchase made over the following 13 months.When you purchase a mutual fund, you are hiring professional management to make decisions for you in the stock market. Most diversified funds should be treated differently from individual stocks. A stock may decline and never come back in price. That's why the loss-cutting policy is necessary.However, a well-selected fund run by an established management organization will, in time, almost always recover from the steep corrections that naturally occur during numerous bear markets. This is because mutual funds are broadly diversified and should participate in each recovery cycle in the American economy.Therefore, an extraordinarily different strategy should be employed with mutual funds. Each time you get into the thick of an economic recession and the newspapers and TV tell you how terrible things are, why not add to your fund when it is off 25% to 30% from its peak price. It might even be a possible time to borrow a little money and buy more shares. If you are patient, within two or three years the shares should be up sharply in price.Remember, you're going to hold through many economic cycles, so why not be smart and add to your investment during each bear market? You can also reinvest your dividends and capital gains distributions and benefit from compounding over the years. When you buy your growth mutual fund, you should make up your mind at the outset that you are positively going to sit through the next three or four bear markets or economic recessions. This will give you the maximum opportunity to make really big money.