Where do you park your money? Do you shift your investments during booms, recessions and slowdowns?
If you just own cash (and your CPF), that’s alright. Savings accounts may grow slowly, but they’re one of the safest investments to keep your earnings safe from market fluctuations.
However, inflation risks the erosion of your savings over time, if it grows faster than the interest rate of your bank account.
Whether you only keep savings or already deep-dive into risky stonks, you’re already making a decision about the best place to park your money!
But did you choose the best parking lot?
These parking spaces for your money are known as Asset Classes, and there are about 7 of them:
- Cash (Savings accounts, hard cash)
- Stocks / Equities / Shares (Includes ETFs and Index funds)
- Commodities (Gold, Crude oil, Wheat, Live Cattle)
- Real Estate (REITs, property, dat HDB)
- Fixed Income (Bonds, Fixed Deposits, CPF)
- Cryptocurrencies (Not a stock hor! Crypto is poorly correlated to other asset classes, and given the diverse sub-categories within crypto, I think it’s fair to give them a class of their own.)
- Investing in yourself (kidding) (not really) (do it)
People shift their dough between asset classes all the time.
In economic recessions, safe slowmoving assets like cash and fixed deposits make more sense. In optimistic booms, you would wish that your money was in stonky stocks for higher growth.
Recognising where we are in the economic cycle can help you predict the future.
Put less magically, you’ll be able to recognise the best times to shift your money from one family of assets to another.
Like a farmer waiting for ripe spring soils before planting, it helps to know the seasons!
The economic cycle has four stages: Expansion, Slowdown, Recession, Recovery.
Many things affect this cycle! Consumer optimism, changing interest rates and government policies influence how much money people are willing to fling out there, and how much they want to keep in their pockets.
Here is how most investors rotate assets in each part of the cycle:
Recovery -> Expansion
Right after a recession, optimism starts to rise and interest rates are decreasing. people are willing to borrow and invest. Industries like tourism, retail, automobiles and technology start to accumulate demand. ETFs are a very popular way to take advantage of the higher return rate of equities while spreading your risk exposure in these high times. When it becomes clear that governments will raise their interest rates, this is the best time to sell bonds and increase exposure to inflation-sensitive commodities and real estate.
Expansion -> Slowdown
While business continues to do well, fears of a pending crash and all-time-high interest rates (aka governments trying to encourage less spending and inflation) often result in a sector rotation within stocks to safer, blue-chip dividend growth stocks (think Pepsico, 3M, P&G). As the expansion slows, it’s a good time to collect your earnings from past optimism and growth by selling higher-risk stocks, equities and shares at their all-time-highs and accumulating cash and fixed deposits before the next recession.
It’s hard to predict when the economy is in a slowdown or still in expansion. In times of doubt and uncertainty, Gold is a popular hedge which may still be volatile but never go to zero.
Slowdown -> Recession
If you’ve allocated your assets well, this is you in a recession!
When the market crashes, business optimism takes a hit and investment sell-offs trigger massive drops across the economy.
Schoolkids remain blur, generally insulated, and quite happy.
In a recession, pretty much all asset classes decline. Whatever the cause, crashes are often sudden! Here, the art of moneyparking becomes more about losing less than seeking growth. Once it’s clear that an economy is in decline, goverments reduce interest rates to ease the drop, making bonds and fixed assets more attractive investments to buy.
Recession -> Recovery
At the very bottom of the recession, it is a great time to buy resilient stocks which you think will last through the recession and return again (just like SG Airlines in the heart of COVID last year…) As the mothers say, “This one is by the government … won’t fail.”
This is the part of the market where you “Be fearful when others are greedy. Be greedy when others are fearful.” (quote by Britney Spears)
Sentiment around the very bottom of a recession is awful – people are pessimistic, companies are doing very badly, and it can often slip one’s mind to tackle the market with an aggressive, optimistic portfolio. But that is the best time. Stocks perform best over the long term, and depending on your risk tolerance and needs, having some cash around to invest more during recessions can help you emerge with a better outcome.
Using the Economic Cycle for decisions
Knowing how money flows cyclically can help you in other choices too!
For example, if you were deciding whether to buy or rent a home, and wanted to know if real estate would be a better investment than having spare cash for stocks from renting your house, you might want to look at how the real estate market has historically reacted around big crunches like COVID!
In fact if you took the remaining, er, $2000-3000 of cash you had and grew it at a faster rate than the property market, you might end up with more value than if you bought a property!
With new eyes, you see your cash and property as two different types of investments, subject to the economic cycle in different ways.
I hope this helps you see the variety of assets out there, and how they respond to the market!
You can let me know your feedback in the comments, I’d love to hear suggestions to make these posts more useful.
Happy planning, cheers.