1. While building our financial plan to meet goals, expectations should always be conservative after taking care of long-term inflation impact.
2. Economic cycles represent the correction of excesses that have taken place over periods of time.
3. Actually, during an up cycle,
a) there is an overall optimism,
b) capital is available to set up several new businesses as investors are confident about future,
c) economic activity expands with assumptions about revenues, costs and profits riding on growing consumption and demand, and
d) investment increases as revenue increases.
4. Inevitably, however, upcycles can't last forever, unless unlimited capital is available at low costs, and demand also remains high even at higher prices.
5. When upcycles finally reverse, businesses soon reach the bottom while trying to protect against failure, by cutting investment and costs, and seeking demand for their products and services.
6. Hence boom cycles go bust, then move on to recession, followed by recovery, and back again.
7. The reluctance of most investors, especially in emerging markets like India, to build economic cycles into their investment strategy, emnates from the economic environment that has influenced returns for a long time, but which has now become tougher than before.
8. This results in ordinary investors assuming such risks that they have been ignorant about, which can hurt them when the inevitable cyclical factors eventually come into play, even if with a lag.
9. A shift is, therefore, needed in the investor mindset to understand that:
a) investing can't be about making opportunistic gains always,
b) risks need to be factored in,
c) return expectations should be realistic,
d) windfalls on investments cannot be a regular, sustained event, and
e) it's time to look out for economic cycles, without expecting the next unexpected windfall.
10. But we should also know that there's no rule in the book that would have helped in making better choices with predictable outcomes everytime.
2. Economic cycles represent the correction of excesses that have taken place over periods of time.
3. Actually, during an up cycle,
a) there is an overall optimism,
b) capital is available to set up several new businesses as investors are confident about future,
c) economic activity expands with assumptions about revenues, costs and profits riding on growing consumption and demand, and
d) investment increases as revenue increases.
4. Inevitably, however, upcycles can't last forever, unless unlimited capital is available at low costs, and demand also remains high even at higher prices.
5. When upcycles finally reverse, businesses soon reach the bottom while trying to protect against failure, by cutting investment and costs, and seeking demand for their products and services.
6. Hence boom cycles go bust, then move on to recession, followed by recovery, and back again.
7. The reluctance of most investors, especially in emerging markets like India, to build economic cycles into their investment strategy, emnates from the economic environment that has influenced returns for a long time, but which has now become tougher than before.
8. This results in ordinary investors assuming such risks that they have been ignorant about, which can hurt them when the inevitable cyclical factors eventually come into play, even if with a lag.
9. A shift is, therefore, needed in the investor mindset to understand that:
a) investing can't be about making opportunistic gains always,
b) risks need to be factored in,
c) return expectations should be realistic,
d) windfalls on investments cannot be a regular, sustained event, and
e) it's time to look out for economic cycles, without expecting the next unexpected windfall.
10. But we should also know that there's no rule in the book that would have helped in making better choices with predictable outcomes everytime.