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Investment clocks and asset allocation

Is it 4pm or 8pm? Telling the time can make (or save) you money.

Institutional investors always ask what time it is.

Not (only) because they have an expensive lunch with a pension manager to go to, but also because there is an investment clock that reflects the business cycle.

The pretty clock shown here was created by Merrill Lynch.

Merrill went bust shortly afterwards, so you might wonder if the clock is faulty.

But in fact the idea of an investment clock has been around for decades.

The investment clock captures two important truths:

  • No sector of the economy, or asset or company exists in isolation.

Boom and bust is nothing new, despite what doomsters will have you believe.

It’s inherent in the cyclical expansion and contraction of the economy that it overheats and is cooled off, either intentionally through interest rate rises, or else through asset price crashes or similar market medicine.

The business cycle: Generally up but regular downs.

The business cycle: Generally up, but regular downs.

(Source: WelkersWikinomics)

The following image shows how the different sectors or assets do well at different points in the business cycle:

You can clearly see where the investment clock idea comes from.

It’s 7pm on the investment clock! I’m going to be rich!

It would be nice if telling the time on the investment clock was as simple as seeing when it’s time to leave the office.

In fact, telling the time is extremely hard, and the difference between a couple of hours on the clock can have huge ramifications.

Cyclical shares, for instance, can easily fall 80% or more in the event of a recession. Later they rally almost as hard ahead of a recovery.

False starts also complicate matters. The hands on the investment clock can go backwards as well as forwards.

Several times in an expansion or contraction it will seem like a new phase has begun, only for the economy to step back in the other direction.

If market timing was easy, we’d all be doing it. And then it would no longer work, because we’d be bidding up the prices in advance.)

The uncertainty about the business cycle and what impact it will have on asset prices is one reason why investor sentiment also tends to cycle from despair to euphoria and back again every few years.

Using the investment clock

I think the investment clock concept is useful in understanding how economies relate to asset classes.

And I agree it’s potentially useful – if you’re an active investor – when you’re deciding where next to direct new money, particularly if you’re rebalancing your asset allocation.

You might decide to direct new funds towards a sector that you judge is coming up on the clock, for instance. It could look cheap, unless others agree with your time-keeping and have already started buying…

But as always, drip feeding money into the market long-term will be a better course for most people than attempting any market timing.

Remember too that regular rebalancing can automatically take advantage of the cycles in the market without you having to make judgement calls, by naturally selling some of your winners in the good times and topping up on what’s down in the bad.

Tending to your asset allocation rules like this will be more beneficial for most investors, even those who find investment clocks helpful in making sense of the economy.

The fact is simple methods of market forecasting don’t work – at best you’ll have to make a a series of correct judgement calls, which very few have proven consistently able to do.

Do you feel lucky, punter?

Other investment clocks

For fun I’ve collected a few more investment clocks from around the web, and included them with a few comments below.

Merrill's version of the clock originally put more emphasis on asset allocation than the business cycle.

Merrill’s version of the clock originally put more emphasis on asset allocation.

This clock from LIGM Research takes poetic license with the business cycle.

This clock from LIGM Research takes poetic license with the business cycle.

A clock for traders. Jim Cramer would like this one.

A clock for traders. Jim Cramer would like this one.

A useful flashback for those of us who never got bored in school.

This clock is a flashback for those who never got enough of school.

Equity classes usually follow a rough cycle, too. Don't bank on perfect timing!

Equity classes usually follow a rough cycle, too. Don’t bank on perfect timing!

Fidelity's investment clock highlights the link with inflation.

Fidelity’s investment clock highlights the link with inflation.

Source: Fidelity

Please note: Unless stated, no original source was cited when these images were found. If one of these clocks is yours and you can prove it, please do drop me a line and I’ll either credit you or remove the image as you see fit.

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{ 19 comments… add one }
  • 1 Havvy June 28, 2009, 9:28 am

    I must contend your initial assumption “Capitalist economies follow a business cycle”. The business cycle is actually caused by frauds in material wealth. For instance, the printing of fiat money leads to a lowering in the value of a dollar, the dollar which most people thinks is still worth the same, but is worth less, much less over time. Of course, it takes time for prices to adjust. The initial period of that is the boom. The secondary period the bust. Of course, people think they can bring back the boom by just printing more money, but people find out eventually, or it speeds up (hyperinflation) so fast no investment is possible. While the cycle exists currently, it should be explained why, what will happen when it continues, how it can be stopped, and how until it is stopped, how one can profit. You did the last point.

  • 2 Bill June 28, 2009, 10:34 pm

    Havvy, I’m forced to assume that you have not had much experience or education in the field of economics. Whether we use fiat money or the gold standard, there is a very real business cycle and it has been happening for centuries. It is the result of a great many inefficiencies in the market that prevent that market from ever truly reaching equilibrium.

  • 3 The Investor June 29, 2009, 8:58 am

    Havvy, as Bill says, I believe the business cycle is an inherent part of a capitalist economy and/or market system, regardless of the monetary base.

    To see it in its pure form, look at commodity extraction as a sector. Miners invariably delay production while prices rise, because they fear their investment will be wasted (or worse) should prices fall. Eventually prices get so high that the potential rewards of expansion are greater than the perceived risks, so they expand production, find new reserves and open new mines etc.

    Since their particular mined resource is in demand, all is well, the market absorbs the new supply, profits rise further for the miners. Perhaps the old cautious management is sidelined for those who think mining has entered some new perpetually expansionist era. (You saw this with banking in the 1990s, for instance).

    This is the boom phase.

    More mines are opened, more money enters the sector – old hands may even sell out as they sense the maths no longer makes sense except on the thinnest margins at the highest prices (see for comparison commercial property from about 2004-2007).

    Typically with mining, eventually either demand eases off because of a slowdown elsewhere in the economy (myriad reasons) or else supply overtakes demand. Both lead to a fall (maybe bearable) or a collapse (bad!) in prices.

    Mines that were barely economic at the old prices are now loss making. Companies start to go bust. Mines are put on sale – but nobody wants a mine now, driving prices down lower.

    This is the bust phase.

    You see similar patterns in all sectors, in different guises. It might be employment costs, investment flows, regulatory changes, all kinds of mounting inefficiencies.

    Money supply is just one of many factors. Of course governments while try to increase or choke off the supply of money (and consequently inflation) as part of their management of the economy – with an aim to smooth out the highs and lows – and it’s true the results can vary. But it’s just one small part of the picture, in my opinion.

    Thanks to you and Bill for your comments! 🙂

  • 4 Neverland September 24, 2015, 10:45 am

    While its fun trying to tell where we in the economic cycle and a good opportunity to puff your intellectual feathers up like a peacock most likely there is no point

    Just save, invest your savings regularly and hope

    I’m always reminded of William Goldin’s quote on Hollywood: “Nobody knows anything…… Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one.”

  • 5 John B September 24, 2015, 11:13 am

    As the value of a share is not merely the integrated value of its future dividends (rising at certain points of the cycle, falling at others), but also controlled by expectations of its future price, you can only benefit by being contrarian to general opinion. So if the papers say its time to buy mining stocks, its too late, unless you disagree, and decide to sell.

  • 6 M from There's Value September 24, 2015, 1:02 pm

    I think even if we strip it back to a really basic idea there is still a business cycle, or economic cycle e.g. an agrarian-based economy like way back when before the industrial revolution. The cycle would be based on the peaks and troughs of the various harvests. And of course, a ‘market crash’ i.e. a drought, plague of locusts, or a potato famine could destroy the economy just as various major events affect our modern-day economy.

    Not to mention the effects of new technologies and inventions that suddenly change the cycle e.g. the invention of the printing press, the spinning jenny, crop rotation, the internet, robots, etc. – these all have the power to radically alter our cycle in a very short timeframe… which I guess proves that even if you were somehow great at timing the market, you don’t know what’s coming round the next corner.

    Cheers

  • 7 Richard September 24, 2015, 1:28 pm

    Of course there are business cycles. Businesses are living breathing things that reflect everything else that is going on. Me, I prefer a rather simplistic appraoch.

    1. Only ever invest for a yield.
    2. Only ever buy on the dips.
    3. Make sure you pay the lowest charge (s) possible.
    4. Only invest in single shares if you understand the business based on knowledge and experience.
    5. Cash is king – all the time – ‘street trader’ mentality – £10k in the hand is 10% on a £100k deal.

    Stick to the above at all times. Everything else is opinion not fact. Who knows what is going to happen next?

    Meanwhile this whole clock thing feels like it was created by those who are trying to justify higher levels of charges and to introduce obsfucation for the poor punter – bit like mobile phone pricing – so complicated no one can work it out.

    Keep up the good work.

    Richard

  • 8 Jim McG September 24, 2015, 3:07 pm

    Reading this reminded me of the William Goldman quote about writing screenplays in Hollywood. He advised aspirant writers that when it came to it, they should remember “Nobody knows anything….not one person in the entire motion picture industry knows what is going to work”.
    Same for investing, really! Pick a strategy or style you enjoy and work at it. Who knows, you might get a hit.

  • 9 The rhino September 24, 2015, 6:03 pm

    Isn’t that what neverland just said?

  • 10 The rhino September 24, 2015, 6:04 pm

    Must be a trending meme

  • 11 Neverland September 25, 2015, 8:55 am

    @Rhino

    …er no, its a book….

  • 12 The Rhino September 25, 2015, 9:39 am

    @Neverland – You’re a no nonsense fella – I’d like to read your favourite booklist, you should publish it like Jimmy McG has..

  • 13 Neverland September 25, 2015, 10:57 am

    @Rhino

    Ed Bunker – No beast so fierce – good preparation for early retirement

  • 14 The Rhino September 25, 2015, 11:26 am

    @neverland much appreciated, consider it read..

  • 15 magneto September 25, 2015, 12:01 pm

    “Remember too that regular rebalancing can automatically take advantage of the cycles in the market without you having to make judgement calls, by naturally selling some of your winners in the good times and topping up on what’s down in the bad.” TI

    +1

    For those heavily into business cycles using chartist or other methods, Martin Pring (a chartist) published ‘The All Season Investor’ in 1992.
    His website can be found under Pring Turner.
    Pring suggests that a business cycle can be divided into six stages :-
    1. Bonds bullish, Stocks and Commodities bearish.
    2. Bonds and Stocks bullish, Commodities bearish.
    3. Bonds, Stocks and Commodities bullish.
    4. Stocks and Commodities bullish, bonds bearish.
    5. Commodities bullish, Bonds and Stocks bearish.
    6. Bonds, Stocks and Commodities bearish.
    An investor might guess we are now at stage 2, but Pring keeps changing his own mind over the last few years.
    The book is very persuasive but this investor found that only with hindsight can the investor really tell where the cycle is. Trying to guess where we are on any particular day is near impossible and the pattern can break down.
    Pring himself concedes the ‘carriages of the train ‘ sometimes come round the circular track in a different order.

    So strongly agree with TI that the best we can do in the real world is to rebalance thereby adding low, reducing high; and ignoring the siren call of the clock/seasons approach, tempting though it may be. We may be early shifting into falling asset classes, but the income achieved will pull us through the trough. Similarly at peaks reducing early will not result in a great loss of income.

  • 16 John Kingham September 25, 2015, 2:41 pm

    I’d have to put my hat in with the “stick to plan A and don’t worry about the macroeconomics” brigade.

    Clocks (perhaps unwittingly) imply nice mechanical predictability, but the economy is anything but. It may move in cycles, but it’s more like the cycles of the climate or oceans; they repeat, but with unpredictable timings and magnitudes each time.

  • 17 Mathmo September 25, 2015, 10:40 pm

    Which lie did I tell? Would seem like an appropriate William Goldman quote.

    Be discipined when others are fearful. Be disciplined when others are greedy.

  • 18 Minikins September 26, 2015, 11:01 am

    Love these diagrams and clocks to help picture patterns and cycles in the market. Doesn’t matter if they aren’t perfect: even the old broken clock will be right twice a day- and that is a fact but is it a reason to wear a broken watch? I sometimes do, but I wear it because the watch is pretty..

  • 19 Financial Samurai September 27, 2015, 4:44 pm

    Good visualization.

    We have AT MOST two years left in the US housing market before prices start flatlining to going south.

    I can feel it all around now, the slowdown.

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