Understanding the economic cycles in the society which you do business is THE most important thing you could possibly learn from this website. These cycles create a guideline to follow and if they are not adhered to it will lead to financial ruin.

When you understand economic cycles, you know the best time to invest in stocks and in real estate. You know when to get out of any risky investments and when to stay. You know when to have cash and when to invest it all.

On the other hand, if you don’t understand Economic Cycles you’ll invest at the wrong time and lose money. You’ll switch jobs at the wrong time and lose your job. 99% of the time you will suffer financially for not understanding Economic Cycles.

This video, from Billionaire Investor Ray Dalio, explains the cycles of the Economy.

How To Use Economic Cycles in The Stock Market

When understanding economic cycles you can get a better picture of the long-term trend in the stock market. It always goes up and down but just like the productivity line, up and down but in an upward slope.

Economic Cycles and Productivity Growth | The Income Adviser

Therefore, you can invest at any time (at the end of a crash or right before a crash) and over time you will undoubtedly make a profit. With this in mind, we can create a strategy that takes into consideration all the factors that the economy plays in the stock market.

We know that at some point the stock market will go down in value and at another point in time it will rise in value. Therefore, we want to find a way to profit from that move upward and limit our loss from the move downwards. The best way to do this is to understand what goes up when the stock market moves upwards and what other assets go up when the stock market moves downwards. Then we diversify IN EQUAL WEIGHTING across those different assets.

Read More: Investing In Stocks For Beginners

How To Use Equal Weighting When Investing in The Stock Market

Equal weighting is by far the best way to diversify in the equity market (stock market). Let’s use an example that illustrates what I mean by Equal Weighting.

               ⁃             Say you have $100 and you want to diversify in equal weighting across stocks and gold.

               ⁃             Say Gold deviates 10% a year (moves down 10% and up 10% from the start of the year) and the stock market deviates 40%. If you have $100 you don’t want to put $50 into the stock market and $50 into gold because when the stock market goes down 40% (50-20=30) and gold goes up 10% (50+50=$55). You’re still losing 15% of your money (100-15=85).

               ⁃             But if you put more into gold at the late stage of an economic cycle (80%=$80) then you would make money. The stock market went down 40% (20-8=12) and gold went up 10% (80+9=89).

               ⁃             You would make 1% on your money even though the stock market went down 40%!

Therefore by diversifying with equal weighting and not an equal amount you can potentially make money no matter what happens, rain or shine. With equal weighting and the fact that productivity is constantly increasing you could potentially make money every single year and compound your money into hundreds of thousands if not millions of dollars.

How To Use Economic Cycles in The Real Estate

No one should tell you to try and time the market by trying to purchase real estate and sell it before a crash. It’s not safe, real estate isn’t liquid enough to do that, you could lose everything, and it’s just plain stupid. However, what we can do is put ourselves in a situation where the economic cycles don’t affect us and again make money rain or shine.

“Don’t go for the get rich quick, go for the get rich FOR SURE!” – Grant Cardone

Most people who buy single-family homes think it’s a safe investment but they don’t understand just how risky it can be. When the real estate market crashed by 30% and 50% in some places in 2008, combined with the fact that many people lost their jobs at the same time, a large number of people ended up losing everything. It’s wasn’t their fault. They were told their whole lives that owning their home is a good investment. They saw people making money off of homes but they didn’t see history and how home prices have fallen dramatically time and time again. If they had understood Economic Cycles they would have known not to buy a single-family home because it exposes them to great financial suffering every time home prices fall (which they will again).

The Best Type of Real Estate: Multi-Family Real Estate

The best thing to do is to provide yourself with enough income every single month from your real estate to withstand the end of debt cycles (market downturns) and to take advantage of the uptrend in real estate prices. The best way to do this is multi-family real estate.

Multi-family real estate, such as apartments, are better for you to own than single-family residents for many reasons. One being that apartments pay you every single month with enough cash flow to maintain the residence and pay for the loan. Therefore, during a market downturn your still making money and can afford to hold on to the property. Then, when prices go back up and past the original price, you would also make money off of the appreciation. Therefore, with multi-family real estate, you have put yourself in a situation to capitalize on the market going up and have limited your exposure when it goes down. Thus making money rain or shine!

Summary

Understanding Economic Cycles will save you money and can make you a lot more. If you can limit your exposure to market downturns while still taking advantage of the markets rising; then the only thing stopping you from achieving financial freedom is yourself.