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:
- Capitalist [1] economies follow a business cycle
- No sector of the economy, or asset or company exists in isolation.
Boom and bust is nothing new, despite what bear market [2] 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.
(Source: WelkersWikinomics [3])
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 [4].
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 [5] 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 [6] – when you’re deciding where next to direct new money, particularly if you’re rebalancing your asset allocation [7].
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 [8] will be a better course for most people than attempting any market timing.
Remember too that regular rebalancing [9] can automatically take advantage of the cycles in the market [5] 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 [10] 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 [11] 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.
This clock from LIGM Research takes poetic license with the business cycle.
A clock for traders. Jim Cramer would like this one.
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!
[12]Fidelity’s investment clock highlights the link with inflation.
Source: Fidelity [13]
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.