19 September 2015

Trading in Market Cycles: Threats to your Portfolio

Find out how economic and market cycles affect your portfolio management.

​Managing your portfolio to guard against potential threats could be challenging: on the one hand, you want greater rewards than you would earn leaving your cash on deposit in the bank but, on the other hand, you need to be risk aware.

Being risk averse, you may see little reward, but having little regard for risk, you may expose yourself to potential dangers which can quickly erode your capital.

Here are the key headwinds investors face when building a portfolio, and the warning signs to look out for:​

Economic cycle


  • Geopolitical
    • Warning: Wars, conflicts, political upheaval all create economic uncertainty
  • Monetary policy
    • Warning: Falling interest rates and monetary stimulus means the economy is in trouble
    • Rising interest rates and withdrawal of stimulus means the economy is recovering, but beware inflation
  • Inflation
    • Warning: Inflation is good for the economy if it rises steadily in line with wage growth, but prices rising too quickly can stifle growth
    • Very low inflation can also hold back wage growth and therefore economic growth
  • Deflation
    • Warning: Prices contracting is bad for business, which is bad for wages and the wider economy
  • Recession
    • Warning: Economy is contracting, which weighs on sentiment, industries slow production
  • Recovery
    • Warning: Business confidence increases, the economy expands until it gets to the point where supply outstrips demand. The economy begins contracting again​


Market cycle


  • Bull market
    • Warning: Investors fear they are missing out, so they buy assets even though they are expensive
  • Bear market
    • Warning: Investors don't want to sell the assets they hold as the losses would be too painful, so they hold on in the hope of a rebound
  • Market overheating
    • Warning: Stocks' price-to-earnings (P/E) ratios are high compared to historic values, earnings are failing to keep up with price rises
  • Bubbles
    •  Warning: Prices rise dramatically in excess of the asset's fundamental value, followed by collapse.
  • Correction
    • Warning: A market has fallen at least 20% from peak to trough, P/Es revert back to historic averages
  • Market meltdown
    • Warning: Stock valuations fall through the floor, companies are worth less than the assets they own


Bull Market Vs Bear Market | Image Source: iStock

Investor Behaviour


  • Low confidence
    • Warning: You are indecisive, so you risk losing out on a bargain or failing to exit an investment at the right time
  • Overconfidence
    • Warning: You can ignore what the data is telling you, because your conviction is so strong
  • Too little data
    • Warning: Trading off the back of a single data set is always dangerous. You are backing yourself with little evidence your trading idea will work
  • Too much data
    • Warning: Studies have shown that having too much data can also skew investment decisions​​



  • Black Swans

    Warning: These are the most nefarious threats to an investor's portfolio because they are high impact events which don't come with any warning signs. See the Risk Management and Agile Trading sections for tips on how to turn a Black Swan white. ​​


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**The FX Active Trader price plans are designed for active traders who trade over 20mln notional per month.


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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.