A couple of days ago, I heard something on CNBC that caught my interest - the concept of an 18 year market cycle. Researching it a little more brought some rather startling revelations about historical market performance. The general concept of this theory is that the stock market tends to run in cycles that last about 18 years - and these cycles are either bullish or bearish on an overall basis.
First think about the cycle itself: the last bull market is generally accepted to have begun in 1982 - and the way things look right now, it ended in the spring of 2000. The bear cycle prior to 1982 begun in approximately 1974, with a bull market prior to that beginning after World War 2. And prior to that, we had the stock market crash of 1929 with the resulting depression triggered by it. Think about this for a moment: if this cycle turns out to be the case, it means that our current market cycle could last toward almost the end of the next decade! Horror of horrors!
I this proves to be true, then how can an investor watch out for themselves in this type of market? The general theme is that a 'buy and hold' strategy will not work in a non-bullish cycle - obviously if a market moves sideways for years on end, there will be no capital gains made during that time frame. This would conceptually apply to index funds as well (i.e. passive investing).
Rather, an active investing approach is required - which for most of us means professional management of funds through quality investment managers like Dodge & Cox or T. Rowe Price.
While I am not suggesting that this theory is a valid predictor of market behavior, it does provide an interesting historical perspective on market trends - so you may wish to consider it when allocating your investment dollars amongst actively and passively managed funds. By taking a prudent investment approach, you can help mitigate some risk to your investment portfolio while still trying to maintain positive investment returns - no matter what type of market cycle we may be in.
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