One of the most important investing lessons is becoming aware of trends. While this step sounds complex, it’s simpler than it may sound. Like most investors, I’ve learned firsthand that overlooking this step can be brutally painful!
Trend awareness keeps you from investing your money at the top of a market and then selling at the bottom of a market. It seems like this would be easy, but it is one of the most common mistake investors make. By simply developing an awareness of the cycles in the financial markets, you can take advantage of one of the most important investing lessons.
Here’s how it works….
The economy moves in cycles of expansion and contraction. When the economy is expanding, there are plenty of jobs, and spending fuels the growth in the companies; this in turn fuels the stock market.
Goods and services become too expensive due to all of the demand from the growing economy. Finally, the Federal Reserve steps in and raises interest rates in an attempt to avoid excessive price increases, which is also a sign of inflation. This is followed by the economy slowing due to the increased prices and higher interest rates.
The financial markets, however, don’t move in perfect correlation with the economy. It they did, avoiding the tops and bottoms of markets would be a little easier. Financial markets anticipate moves in the economy. The good news is that there are other factors and simple tools that can guide investors to make smart decisions about investing their money.
Many financial experts recommend sticking with a diversified portfolio with set allocations in different types of investments no matter what the financial markets are doing; this is a very common strategy. Unfortunately, the diversified buy and hold strategy didn’t work so well in the first decade of the 2000’s. Some strategies did, however, have good performance during this challenging time frame; those strategies took advantage of tools to identify trends.
The first step is to make a decision to own responsibility for your money. The next step is to develop an awareness of market cycles; you are probably already very familiar with trends from your experience in the housing market if you are a homeowner. The last step is becoming familiar with the simple tools that help you avoid buying high and selling low with your savings account.