The Investment Clock

What is the Investment Clock?
The investment clock is one of the best indicators on the movement and condition of the finance, property and equties markets. It was first published in London’s Evening Standard in 1937 and showed the movement of markets within a decade cycle. Many people, however did not readily accept the probability of events turning out in a cyclical fashion so it took a while for some to warm to this new area of thought.

History clearly indicated that this probability was very high so it was suggested that the sooner people understood and embraced the time clock indicators the better.

The usual length of the cycle trough is 7 – 9 years, although it can move up to 8 – 11 years. The investment clock seemed to always indicate that real estate property was the last asset to respond and move. When the cycle enters a credit squeeze mode, property becomes the most difficult of all assets to sell  and therefore the most dangerous to own or deal in. High quality real estate with little or no debt was seen as being able to weather any storm but where there was debt involved then trouoble could occur as debt affected cash inflows.

The Bottom of the Clock
At the bottom of the cycle when fear and bankruptcy are abounding and interest rates are down, remember that this is the time to be positive. It is the time when there are bargains galore, ready for the taking.

The driving factor behind the business cycle is the capitalist system itself. Recessions are a way of ridding itself of excesses. Things like speculative lending by banks, high risk real estate trading and inflation. Society simply starts going a bit faster than the economy and places a lot of strain on resources. This means we are left with inflation and high interest rates. The bank then imposes a credit squeeze for a period, long enough for those excesses from the system to force inflation down.

Always remember that during a slump the price of most things will fall, but the value of cash does not. In fact, the value of cash goes up because it is measured by its increased ability to buy things more cheaply. This is the best time to hold cash and come out of those holdings when the economy is in the doldrums.

When Business Cycles Occur
Most new investors will wait until the market starts to move up before they buy shares or property. The trouble is, by the time they are aware that the market has moved, the experienced investors have already moved away from the market to the next level.

Experienced investors around the world do this because they buy before the market starts to inflate and prices rise. One way they understand the movement in the market is by knowing about the investment clock. The investment clock is based on the well-known phenomena that business cycles occur on average every 7 – 9 years.

Understanding the Investment Clock
As an investor you need to understand fully the movement and the implication of the investment clock. Once you have lived through an investment cycle and seen the recurring nature of the booms and the busts and the rises and the falls, then you will become a better investor because you will understand the importance of timing in your investment decisions.

You have to be totally familiar with the workings of the investment clock because it is an important tool that will guide you along your journey to financial success. The value of the investment clock is its ability to show the cycle relationship between investment such as shares, property and fixed interest, as well as the order in which they all occur. It is not a good indicator for predicting the timing of various trends in the market with any accuracy.

The investment clock tells you the most appropriate investment medium after taking into account the prevailing indicators such as interest rates, commodity prices and inflation. It shows that the share cycle, for example, is followed by the real estate and then the fixed interest cycles. The investment clock has proven accurate in reflecting the market forces that drive the various types of investment cycles and the order in which they all occur.

The Investment Clock
For example, look at the clock:

  • 12 O’clock
    12 o'clock is the boom and there is a rapid increase in demand for real estate with property rising. These are the boom times for property. The increased demand for property causes interest rates to rise because of the demand for funds. As interest rates rise, companies find it hard to make profits, and because of the rise in the property as well as fixed interest investments at this time, share prices tend to fall.

  • 3 O’clock
    3 o’clock in the investment clock the sharemarket is doing very little and offers few prospects to investors. Interest rates are now too high to make borrowing for property an attractive option. At this time fixed interest or cash investors will cash up their investments, to take advantage of the high interest rates on offer to lenders. High interest rates slow the economy and start to lead the country into a recession. This brings the cycle down to 6 o’clock.

  • 6 O’clock
    At 6 O’clock recession has reached its depth and this usually occurs every 7 – 9 years. Investors are now too scared to invest, or they can’t afford to borrow the money, so interest rates slowly start to fall. Companies have had to become leaner and increase productivity during these times. The economy slowly starts to improve, and with it company profits start to grow, which stimulates the share prices to recover.

  • 7 O’clock
    At about 7 o’clock people have left the market, having sold their shares as a result of the downturn. They retreated to other investments, such as cash or fixed interest, or even property. Interest rates have moved low and eventually the point is reached where the long-term investors see the value in the market and they start to accumulate shares, which are better performing.

Thus, the seeds of the next recovery are sown and eventually shares and commodity prices start to rise.

Why the Economic Cycles
Understanding this cycle and the relationship between the various types of investment is critical if you want to maximise success in your investments no matter what part of the world you live in.

The question is, why do economic cycles occur in the first place? The simple answer is that the world economy is a collection of many nations, each at their own individual point within the economic clock. Each nation is made up of millions of people, each making their own financial decisions in reaction to other people’s decisions.

The sheer momentum of all these economies means that they always over-swing the mark and this results in the economic movements of the cycle.