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How do you determine where the economy is on the business cycle?
Most investment textbooks say to use a top down approach, where you start with the general state of the economy. They normally give some vague determinations like expected fiscal/monetary policy.
Exactly what numbers should an individual investor look at to determine what general area is the most attractive given the current state of the economy.
I know that it has been well documented that certain investment classes are better than others during different phases of the economic business cycle.
What specific numbers should an individual investor look at, and where would you find the numbers to help you make better investment decisions based on the state of the economy?
I know the answer, but I am not sharing it.
B/c if I do, everybody will be investing into same sector as me, and it will make it too expensive and not worth investing into.
The reality is that no one can tell you today where the economy is in the business cycle.
These are things that are determined after all reports come in so we get the news about what it was like last month or last quarter.
Then people try to predict what the trend is.
This is pretty much what mutual fund managers do, base their actions on the recent historical data and make guesses about where teh markets are heading.
When you look at who the top fund managers are, the list is continually changing because they are making educated guesses.
As an individual investor, you don’t need to worry about what the expected fiscal/monetary policy is, because unless you are managing a multi-million dollar asset base (in which case you would not be asking the question you did), you are not going to be affecting the market or having to produce results to keep shareholders happy.
Sectors of the economy that will alwys do ok are sectors that provide the things people have to have. You won’t make a fortune, but your investments in these areas will grow steadily (you still have to monitor them) if they are managed appropriately. Think of the things you use every day and start looking at those companies.
A small part of your portfolio should be things that are a little riskier, thereby offering a greater potential return. These are areas that are delevoping new technology or products – they might suceed, they might not. You might make money, you might lose your investment.
Remember that the more trades you make, the more commission fees you pay.
I actually now make a certain amount of investments based on the trends of various mutual fund managers – I know they have to make a profit and will rebalance their portfolios accordingly. They are not necessarily buying stocks based on the soundness of the underlying company, but on the odds that there will be an increase in the stock price. This means that the fiscal/monetary policy has less to do with the daily stock price than textbooks will tell you.
I wish more people would buy into my compaines – so I could move out of those at a HUGE profit and into other great companies that I’ve researched! Right now, I have to settle for REASONABLE profits.