Business Cycle Investing - Long Term Investor

Articles are being written debating which investment is the best investment for a long term investor. One side of the debate extols the virtues of stocks and having an ownership position. The other side extols the virtues of bonds and having little risk exposure. If you look at Business Cycle Investing the answer is that you want to own both but at different times.

The building blocks of business cycle investing include:1) Any economy has business cycles.2) It is always good to minimize risk and make money.3) In general, the stock market goes us as the economy is growing and goes down as the economy is slowing. The change in the growth rate is also very important.4) The Federal Reserve moves interest rate to keep the economy growing at an annual inflation rate of about 3%.5) The Federal Reserve strongly influences the business cycle by changing interest rates.6) Long term bonds do well as interest rates are dropping and poorly as interest rates rise.

A business cycle has 4 segments: bottom, growing, top, and slowing. The Federal Reserve raises interest rates as the economy is growing at an inflation rate above 3% and reduces interest rates as the economy is slowing at an inflation rate below 3%.During a bottom, where we are now, interest rates are low and the economy is starting to grow. Stocks should be bought and long term bonds should be avoided. You know this phase as the Federal Reserve will publish information that the economy has bottomed and is growing.During a growth period, where we will be, interest rates are rising and the economy is growing. Stocks should be bought and long term bonds should be avoided. You know this phase by the Federal Reserve raising the interest rate.During a top, interest rates are at peak and the economy has stopped growing. Stocks should be avoided and long term bonds should be bought. You know this phase as the Federal Reserve will publish information that the economy has peaked and is slowing.During a slowing period, interest rates are dropping and the economy is slowing. Stocks should be avoided and long term bonds should be bought. You know this phase by the Federal Reserve dropping the interest rate.

An investor that would have followed Business Cycle Investing would have been out of the stock market during most of 2008 and would have been in long term bonds. During 2008 the stock market lost about 40% while long term bonds gained about 40%. An example to put this in terms of real money, a $100,000 account loses about $40,000 in the stock market and gains about $40,000 in long term bonds. You can have an account balance of $60,000 or $140,000. Obviously, it is better to have $80,000 more in your account even if you had to pay some capital gain tax.