World 9 · Investing & wealth building · Lesson 13 of 16

Market cycles

Booms and busts repeat in shape if not in detail. Knowing that makes both easier to live through.

6 min read · Level: Practical · Free — no account needed to read

The idea

Markets move in cycles. Periods of rising prices and optimism — often called bull markets — tend to be followed by falls and pessimism — bear markets — and then recovery. The length and size of each phase are unpredictable, but the pattern has repeated throughout history, with booms often driven by excitement and falls by fear.

Cycles are hard to time. Falls often come when confidence is highest, and recoveries often begin when news is still bad. People who sell after a fall frequently miss the recovery. Knowing that cycles are normal makes it easier to stay with a long-term plan through them — and to be cautious when everyone around you is certain prices can only rise.

Why it matters

Expecting cycles turns a frightening fall into something anticipated, and an exciting boom into a moment for caution rather than greed.

A real example

The situation

During a sharp market fall, Gaurav’s long-term investments drop by a quarter, and he wants to sell everything to stop the loss.

What happened

He remembers that his money is for twenty years ahead and that falls of this size have happened before. He keeps his plan. Within a few years, the investments recover and grow beyond their earlier value.

The takeaway

Seeing the fall as part of a cycle kept him from locking in the loss.

How people actually behave

People extrapolate the recent past — assuming a rise will keep rising and a fall will keep falling — which leads to buying near peaks and selling near troughs.

Common mistakes

• Selling long-term investments in a panic during a fall.
• Buying heavily when prices have risen and everyone is excited.
• Believing “this time is different” without strong evidence.

Questions to think about

• How have you reacted, or how would you react, to a big fall in something you own?
• What would help you stay calm in the next downturn?

Try it: Write your downturn plan

1. Write what your long-term money is for and when you will need it.
2. Write what you will do — and not do — if it falls by a third.
3. Keep the note where you will see it in a downturn.

Words in this lesson

• Bull market — A period when investment prices rise substantially and optimism is widespread.
• Bear market — A period when investment prices fall substantially and pessimism is widespread.