The stock market is known for its cyclical nature. It experiences ups and downs periodically. The change in market conditions over time determines these cycles. The factors that impact market cycles are complex and consist of several variables that may be beyond an investor’s control. Therefore, it is useful for investors to understand the market cycles as it can help them develop appropriate investment strategies to manage their risk and build their wealth over time.
One of the most popular investment strategies for managing risk and uncertainty in the market is the Systematic Investment Plan (SIP). This strategy requires investing a fixed amount of money at regular intervals. SIP has become more popular as investors realize the benefits of investing in small amounts regularly over the long term.
Understanding market cycles is essential while investing in SIPs as it enables investors to develop an appropriate investment strategy. The market cycle can be divided into four stages; the accumulation phase, the markup phase, the distribution phase, and the markdown phase.
The accumulation phase is the first stage of the market cycle, which begins after a market downturn. It is the time when smart investors start buying stocks at reduced prices as they anticipate the upcoming markup phase. During this phase, many investors begin to invest in SIPs as this is the time when the market sentiment is bearish. The combination of the SIP strategy in the accumulation phase can potentially help build a good corpus over time with the investment of the smaller sum.
The markup phase is the bull run phase of the market cycle, where there is consistent growth in the stock market. Market sentiment is positive, and it is the time when investors make hefty returns in their portfolios. During this phase, many investors prefer investing lump sum amounts as the markets are performing and experiencing a high level of bullishness. However, SIP investment strategy during this phase prices averaging becomes challenging and requires a different approach. SIP frequency can be decreased, and the investment can be directed to equity-oriented funds after looking into fund performances and taking investment advice from financial advisors.
The Distribution phase is a time when the market reaches its peak, and it is the last phase of the bull cycle. This is the time when risky investments should be avoided, and investors should focus on investing in low-risk investments. This is the stage where investors who had invested in SIP during the accumulation phase could potentially see return on investment gradually.
The markdown phase is the bear cycle of the market. It is the time when the market is performing negatively, and there is a sharp decline in stock prices. This phase is where the SIP strategy comes in handy. With the SIP strategy, investors can take advantage of the falling market and continue investing regularly irrespective of the decline in the market. This strategy can help create a lower average cost per share during the market correction, later aiding profits in the bull phase.