Why do secular stock market cycles matter and how can you adjust your investment strategy to enhance returns?
So what is a “secular market trend”? A Secular Market trend is driven by forces that could be in place for many years, causing the price of a particular investment or asset class to rise or fall over a long period of time. In a secular bull market, strong investor sentiment drives prices higher, as there are more net buyers than sellers. In a secular bear market, weak sentiment causes selling pressure over an extended period of time
Many investors are not familiar with the long term secular market cycles and the impact they have on how your portfolio is managed. The stock market has demonstrated longer-term secular bull and bear cycles which are extended periods with a common trend. The accompanying chart illustrates the secular stock market cycles from 1900 until 2014. Knowing where we are within these cycles can make a substantial difference in how you choose to invest and whether to buy and hold or to actively manage your portfolio for risk.
During the 1970's (similar to 2000-2013), had an investor purchased all Dow 30 stocks and held them throughout the entire decade (excluding dividends), there would have been very little change to the value of the portfolio. Consequently, unless you were actively managing your account, managing downside risk, and taking profits when you could, you most likely would have been disappointed.
By taking a different approach to investing during the 1970's, investors who followed a more active approach, potentially yielded significantly higher returns. One investment manager, Peter Lynch, became famous as a result his stock selection methodology. Through active management, he successfully generated positive returns for his investors during that very difficult period in the market.
“You've got to know when to hold 'em
Know when to fold 'em
Know when to walk away
And know when to run”
come to mind when trying to decipher a course of action. The last 13 years have trained investors to take profits quickly and move on to the next opportunity before the investment goes back down. Even many investment management companies and annuities have begun to more actively manage their portfolios to limit downside risk, which consequently can also limit the upside potential. Ironically, these newer methodologies would have helped more had they been implemented 13 years ago and not now, just as we appear to be emerging from a 13 year secular bear market. If you're not cautious, you may be investing in a portfolio that is not designed to capture the upside potential often realized in a secular bull market.
What does this all mean? If we are indeed, moving into a secular bull market, which can last anywhere between 10-15 years, it's time to re-learn some lessons from the 1980's and 1990's. That period was a time where you could hold your favorite stocks or indices and return 1-2 decades later to find substantial growth in your portfolio. Many of today’s investors have not experienced a true secular bull market and regrettably may not adjust their investment style until it's too late.
Both buy-and-hold and active investment strategies have a purpose. Knowing the longer-term market cycles, which strategy or combination of strategies to implement, and when to implement them are crucial considerations when making decisions about your portfolio and selecting an investment advisor to guide you through the process. So whether you manage your own investments or prefer the advice of an investment advisor, it's time to evaluate the longer-term secular trend. We at DeMaria Financial Services believe we are emerging into a long term secular bull market that can last anywhere between 10-15 years.
If you like this article and would like to be notified of future Knoxville Investing Examiner articles, please click the confidential “Subscribe” button above this article. Enter your email address and upcoming article links will be sent to you at no cost. Christopher DeMaria also serves the Knoxville area through DeMaria Financial Services. Call today (865-332-5952) to schedule an appointment or to reserve a seat at our next complimentary educational seminar.
The information contained in this report or information provided does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation of an offer to buy or sell any security referred herein. Past performance may not be indicative of future result. No buy or sell orders may be given using the email, please call the above number to contact your Advisor. Christopher DeMaria is registered with and securities offered through Kovack Securities, Inc. Member FINRA/SIPC. 6451 N. Federal Highway, Ste 1201, Fort Lauderdale, FL 33308 (954) 782-4771. Investment Advisory services are offered through Kovack Advisors, Inc. DeMaria Financial Services is not affiliated with Kovack Securities, Inc. or Kovack Advisors, Inc