All you need to know about business cycles to plan your investments

 

plan your investments
Photo by Lukas from Pexels

A business cycle also called an ‘economic cycle’, has five stages.

  1. Launch 
  2. Growth 
  3. Shake-out 
  4. Maturity 
  5. Decline 

Every business and economy has ups and downs. Additionally, understanding when the economic cycle starts or ends can be difficult. That is why you may end up investing in the middle of a process.

Take a look at the image below. In it, you’ll notice that the market has gone through its own set of good events and some bad ones too. However, despite this, the market still seems to rise.

Investing over the long-term

Many analyst/wealth advisors recommend holding on to your investments or staying invested for the long term. But have you wondered how long is long enough? Should you hold your investment for 5-years, 15-years, or 25-years? Read on to find out.

Graphical user interface, chart, line chart

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Note: Major positive/negative events have been plotted.  

Our expert advice

Our experts think you do not have to hold an investment for 20-25 years to get decent returns. They recommend keeping your assets for at least one business cycle as long as 7-8 years. 

Understanding with examples. How to plan your investments

To understand how being invested for at least one business cycle can be ideal, consider two scenarios- investing in the market in 2008 & investing in the market in 2015. 

Scenario 1: 

If you invested via SIPs in January 2008, when BSE Sensex was at 20813 through the SIP route and remained funded for one business cycle (January 2008 – December 2014), here is what the value of your investments would look like over this time.

guide to investment planning
Source: BSE Sensex  

Note: Period understudy is between Jan’08-Dec’14 (No. of months 84). Data for BSE Sensex Index has been taken for calculating the SIP returns. 

 

Year  SIP Amount Per Month  Invested Amount  Accumulated Amount  XIRR  No. of Transaction 
2008  ₹ 5,000  ₹ 4,20,000  ₹ 7,02,503  14.75%  84 
Note: XIRR stands for Extended Internal Rate of Return. It is used to calculate returns on investment where there are multiple cash-flows (e.g., SIP) taking place at different intervals. IRR considers all the cash flows – both inflows and outflows- and all the times at which these cash-flows happen.  

 

According to the calculation above, you made money on your investments even when the market was corrected by almost 60%. Additionally, while 2008 has been considered the worst year for the Indian economy, investors who began investing in then made handsome gains on their investments. 

Scenario 2: 

If you invested via SIPs in Jan 2015 when BSE was at 26909, and remained

If you invested via SIPs in Jan 2015 when BSE was at 26909 and remained funded for one business cycle (January 2015 – December 2021), here’s how your investments would have grown in value over time.

Chart, line chart

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Note: Period understudy is between Jan’15-Dec’21 (No. of months 84). Data for BSE Sensex Index has been taken for calculating the SIP returns. 

Source: BSE Sensex  

Year  SIP Amount Per Month  Invested Amount  Accumulated Amount  XIRR  No. of Transaction 
2015  ₹ 5,000  ₹ 4,20,000  ₹ 7,22,867  15.33%  84 
Note: XIRR stands for Extended Internal Rate of Return. It is used to calculate returns on investment where there are multiple cash-flows (e.g., SIP) taking place at different intervals. IRR considers all the cash flows – both, inflows and outflows- and all the times at which these cash-flows happen.  

 

SimSimilarly, you can count on higher returns despite all the downs of the market if you look at another business. That means all you need to do – is stay invested.

So, to even out the market ups and downs and make higher returns, consider remaining invested for at least one business cycle rather than redeeming your investment over a short-term for lesser gains.

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