“How to time the market?”, is an age-old question. In this article, I will go over how you can use market indicators to decide where we are in the economic cycle and how to create a balanced portfolio. First, I’ll talk about how to invest in the market and when. Then, I will talk about how you can use this information to create an impactful investment portfolio by investing in sustainable and ESG companies.
Technology has enabled people, like you, to invest in small quantities resulting in:
- Millions of new stock owners with sustainable ideals that companies cannot afford to ignore
- The ability to diversify
- A reduction in overall cost associated with investing (fees)
I’ll show you how you can diversify your portfolio while making a positive impact on the environment by supporting companies that help solve the world’s biggest challenges. It is about putting your dollars to work by buying products from and investing in companies that put the people and the planet first.
In my post called, “Sustainable Investing: How to Diversify and Perform Well in Any Market” I talk about using the business boom and bust cycle to think critically about which sectors of industry will perform well and why.
For example, consumer staples, health care, and utilities tend to do well or at least hold their value in recessionary times.
Why? Because you need to buy groceries, go to the doctor if you get sick, and turn your lights on at night… You will do these things, even when the market is down.
There are two kinds of mentalities when it comes to investing. You are either a Momentum or Contrarian buyer.
Not sure which one you are? Read “Investing Strategies: Contrarian Versus The Crowd Consensus”.
Once you have a good idea of whether you are a momentum or contrarian buyer, you can use the following two indicators to help you make purchasing decisions.
1. The Fear and Greed Index (Consumer Sentiment):
Consumer sentiment is “how the public feels” about the current state of the economy. One useful metric is to use CNN’s Fear and Greed Index, which is calculated daily.
The Fear and Greed index is composed of the following 7 economic indicators:
2. The Federal Reserve:
I like to go straight to the source. What better way to see where the market is going than to watch a 45-minute recap of the Federal Reserve Open Meetings (FOMC)!
The Federal Reserve is the entity that sets the monetary policy and tone of the economy. They meet 8 times a year, and their full-time job is to think about the US economy.
One serious indicator is whether the Fed is raising or lowering interest rates.
Why should you pay attention to interest rates?
When the Fed wants to get the economy out a recession it will lower interest rates to spur lending. This allows businesses to borrow, buy equipment, and hire people.
Conversely, when the economy heats up too quickly, the Fed will raise the interest rate to slow it down. When businesses and individuals borrow too heavily, they become over-leveraged. Their debt-to-income ratio gets too high, and the rate at which people default on loans go up.
This, in turn, can lead to a domino effect…Where one person’s missed payment is someone else’s income, which causes that next person to miss their payment.
When people become over-leveraged, it means that they do not have enough equity (cash or liquidity) to cover their debt obligations (payments).
Interest rates are just 1 of 3 major powers that the Federal Reserve has to help stabilize the economy.
Remember, economic reports like the Fear and Greed Index, GDP, and employment rates are statistics that tell us about the current and past state of the economy. It is telling you how the economy has recently performed.
Indicators like the Federal Reserve changing the interest rate reflects how the economy is doing and is a more forward indicator. The Federal Reserve will adjust interest rates based on its analysis of where the economy is and what the future looks like.
Owning a Mix of Offensive and Defensive Stocks
It is important to compose a portfolio that has both offensive and defensive stock so that you can be prepared for a fluctuating market.
Let’s take a look at what offensive and defensive stocks look like…
A Few Examples of Offensive Stocks are:
- Financials (banks, lending companies, etc.)
- Homes (home builders, Home Depot, machine/equipment to build or remodel, etc.)
- Technology (consumer technology)
- Consumer discretionary goods (cars, luxury goods, etc.)
These kinds of stock do well when the public has confidence in the market. On the other hand, in recessionary times, people tend to tighten their belts and not purchase luxury goods.
A rule of thumb is to think of offensive stocks as ones that tend to experience greater fluctuations during economic booms and bust cycles.
A Few Examples of Defensive Stocks are:
- Health care
- Blue chip
- Grocery stores
These kinds of stocks are more reliable and aren’t as heavily impacted by the market.
For example: If economic times are good, you probably aren’t going to start leaving all of your lights on, buying 3x more groceries, and getting surgeries that you don’t need. Conversely, if economic times are bad you aren’t going to stop going to the grocery store or taking your medication.
One way that can help you decide whether a stock is a defensive or offensive purchase is by looking at its Beta.
Often times the Beta can help you decide when to invest in a stock (Sector Investing).
So what is Beta you ask?
Think of the number 1 as being equal to the “markets performance”, and a company’s Beta is always in relation to the market.
Beta is a number between 0 and 2. I suppose you could have a Beta that is higher than 2, but that just means that the stock is 2x as volatile as the market.
If a stock has a greater than 1 Beta, it typically means that the stock will do really well in good times. Conversely, a stock with a greater than 1 Beta will suffer more in bad times. Just equate a large Beta with more volatility.
For example, KB Homes (a new home builder) has a 1.47 Beta. Note that, the Beta can change depending on the stocks perceived volatility.
Photo credit: Yahoo Finance (please note that stock prices are always changing)
If a stock has a lower than 1 Beta, then the stock will tend to hold its value. Economic hard times won’t have a massive negative effect, but the stock won’t rally in a meaningful way in economic good times either.
Now, let’s talk about how you can use this information to create an impactful investment portfolio by purchasing in sustainable and ESG companies.
A Case for Including ESG Companies in Your portfolio:
This means that after studying and combining all of the research from several thousands of studies, the authors found that investing in companies that care about its social and environmental impact is financially practical.
The old line of thinking used to stand that, “You can either make a profit or do good”. That you could only accomplish one or the other. This study shows that this is no longer the case.
Since its founding in 2006, the United Nations Principles for Responsible Investing (PRI) has attracted over USD $68 trillion in assets under management as of April 2017.
In a prior article, I list 5 great ESG ETF Funds that you can invest in that will allow you to support companies that “Do Good”. Eco Economics is about helping you support these kinds of companies.
You can make a difference in two ways:
- Buying natural, reusable, and zero waste products
- Taking ownership in ESG companies through the purchase of their stock
Owning stock in a company helps the company by raising money to invest in R&D and buy equipment to produce more products.
Why should we invest in a Low Carbon ETF?
The Take Away:
In sum, it is not about selling stocks on Wednesday and planning to buy them back on the following Monday. Smart investing is based on long-term (patient) investing in companies with strong fundamentals. Moreover, it’s about properly diversifying your portfolio. If you are investing in ETF’s consider manually dollar cost averaging.
To quote a Forbes Article,
“The success rate for day traders is estimated to be around only 10%, so … 90% are losing money.”
Similarly, the article quotes Cory Michael’s (Vantage Point Trading) even more pessimistic view. He says,
” Only 1% of [day] traders really make money.”
So how can you start saving money today so that you can increase your investment portfolio?
Become minimalist, which will inherently help you save more money. This, in turn, will allow you to invest more. The zero-waste lifestyle has many health and budget benefits.
Eco Economics was created to help you learn about personal finance while creating a more sustainable future.
Like what you see? Stay a while!
- 5 Ways to Save Money by Going Green
- Sustainable Investing: How to Diversify and Perform Well in Any Market
- How to Save for Retirement by Going Green: Insulation
- How to Save for a Down Payment on a Home and Fund a Roth IRA
Do you invest in an ESG company? If so, which one? Feedback is always welcome, so feel free to comment below!