Back To Basics: Understanding Different Market Phases (Boom, Bust, and Wall Of Worry)

Back To Basics: Understanding Different Market Phases (Boom, Bust, and Wall Of Worry)

One of the biggest questions we’re asked by our clients is:

“What are the different market phases, and how do you prevent loss in downturns?”

Many financial professionals prepare a complex answer to this… yet in our firm, we categorise investment markets as being in one of three broad phases.

Phase 1: Boom

Firstly, we have a “boom” period. A booming market only happens once approximately every 15 to 20 years, and features episodes of strong economic growth, growing job markets, low levels of unemployment, and conditions that create strong returns for investors.

Australia has experienced a handful of boom periods in the past forty years, notably from 2005 to 2007, and key periods in the 70s and 80s. A ‘boom’ is where the market presumably goes crazy.

Phase 2: Bust

Inevitably, and with 100% certainty, following every boom comes a bust. The impact of a bust is always in proportion to the size of the preceding boom. Growth slows, unemployment rises, and investment markets lose their shine. Underprepared investors lose significant portions of wealth during busting markets.

Phase 3: Wall Of Worry

Most of the time, the market is neither in ‘bust’ or ‘boom’ mode. It’s in what we call the “wall of worry”. The wall of worry is a period in between boom and bust, and is where market performance wobbles up, and wobbles down. During the wall of worry period, we don’t really see any corrections of more than 20% (in other words, we don’t see any “bear” markets — 20% fluctuation is the technical definition for a bear market). Yes, we see lots of smaller market corrections, perhaps 5% and 10%, but we don’t see any major drops.

The Difference Between Speculators, Traders, And Investors

5% to 10% corrections in the market are nothing to be overly concerned about. Yet, some people spend significant time trying to work out how to make short-term gains from these small corrections. We call these people speculators or traders, not investors. An investor ensures the longevity of their portfolio, through good AND bad cycles.

Surviving busting markets and growing in the “wall of worry” is what separates amateurs from professionals. One of the biggest dangers I’ve seen in downturns is when investors become speculators — all of a sudden they try to predict what’s going to happen next month, or in the next few months… and they start second guessing and adjusting their portfolio. They’ve gone from long term investors to speculators.

This is dangerous, and challenging to successfully perform (there are very few people in the world who can speculate successfully and the ones that do it well are called “successful hedge fund managers”, and they’re multi billionaires…).

What Do Professional Investors Do When A Market Starts To Bust?

Skilled investors are very cautious about when busts will come. I like to use an analogy here: Investors, like all humans, are wired with pre-historic brains. When we hear a rustle in the grass, and we think it’s a sabre tooth tiger (or some sort of threat), we want to either.

  1. Fight,
  2. Fly, or
  3. Freeze.

The market is exactly the same. When bad news is presented…

Investors can fight or fly. This is not a great response, because this feeds into panic… and markets go down even more.

Or, investors can freeze. This can be the best response in the markets, if a portfolio is designed to weather downturns.

Analysing How Money Is Lost

It’s important to understand that there are only three ways that people lose money during a bust market (or any market, for that matter).

  1. Panic selling
    The first way is to panic and sell during a downturn. So for those that panic and sell, they lock in losses. Some argue that panic sellers can ‘buy back in’… but all the research says most people who buy back in do so at higher cost and find it
    almost impossible to regain their previous position.
  2. Being forced to sell
    The other way is if investors HAVE to sell, because they need money to spend. Not one of our clients has had to sell any of their growth assets because part of our process provides between two to four years’ worth of reserves for them to spend
    comfortably in case of downturn.
  3. Not being diversified enough
    The last way people lose is if they’re not diversified enough. A lack of diversification is hurting many investors during the current COVID-19 crisis. It causes investors anxiety and stress.

Can We Help With Your Investment Strategy?

Our clients are successful because their portfolios are designed to survive any market cycle, whether it be boom, bust, or ‘wall of worry’.

Over the past 20 years, the team at McGregor Wealth Management has helped hundreds of hard-working families save tax and maximise their investment so they can accelerate their wealth.

Unlike most financial advisors who focus on market-based investment strategies (often driven by alliances with big financial institutions), the we take a more holistic and client focused approach to help you accelerate your wealth, so you can maintain (and ideally improve) your income and lifestyle in retirement.

Our process is simple and begins with a Free Wealth Potential Strategy Session, during which…

Although many participants realise there is a ‘gap’ between where they are currently, and where they’d like to be, they are relieved to discover there is a realistic way to close the ‘gap’ and achieve a more exciting ‘wealth potential’.

By simply going through this exercise, many people feel more in control of, and optimistic about, their financial future.

To explore how we can help you understand your wealth potential, get in touch to arrange a Free Wealth Potential Strategy Session.

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