Will the stock market fall? The market cycle says yes.

Sure, the stock market will fall, eventually. And then, most likely, it will rise. It is called market cycle because it goes up and down. 

Should you be worried? If you have a poor investment strategy, yes, you should be worried. On the other hand, if you have a solid investment strategy then no, you can sleep at ease.

The psychology of market cycles

Market cycles are a condition that investors must learn to live with. Especially if you are a long-term investor. And with the market cycles comes the psychology of those cycles.

The phases represented in the chart below are repeated over and over again. Of course, it would be great if we could always know where we are in the cycle. But that is virtually impossible. At least being able to know consistently over time. Many investors try to predict where the market is in the cycle at any given moment. Most get it wrong. Few are right, and more as a matter of random success than because they have a fantastic ability to predict market movements. Simply put, the market is too complex, it has too many moving pieces, for any one individual to know what is happening all the time. That is why successful investors like Warren Buffett emphasize that investors should not try to guess the movements of the market in the short term.

The psychological phases of the market cycle
Figure 1: The psychological phases of the market cycle

A strategy with a better chance of yielding positive results is to understand the long-term growth trend of a region, industry, or even a company. If you think that an investment is in a growing long-term trajectory, then it is advisable to invest in it, forget about short-term fluctuations, let time do its work, and reap the benefits in the future. Do you want to learn more? Read our Guide to Investing.

Being a good investor requires much more than intelligence or money. Control over our emotions is required to be able to navigate the market cycle without falling prey to fear or becoming a victim of greed.

What will you do in those moments when stock prices go up and up? What will you do when the market drops 20% or 30%? Knowing how long will any phase of the market cycle last is impossible. Instead of trying to predict that, focus your energy on developing an investment strategy aligned with your investor profile and goals.

Nobody knows whether tomorrow prices will go up or down, but if there is one thing you can be sure about, it is that for the rest of your life these cycles will continue to occur. Adjust your investment strategy accordingly.

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