A Cheat Sheet to Predict Market Cycles
Rich dad said, “The stock market dominates the investment market for a period of 20 years. As the twentieth-year approaches, the possibility of a market crash increases. After the crash, the stock market tends to stay down for ten years. During the ten years the stock market is down, commodities such as gold, silver, oil, and property dominate the investment world. And every five years, there is some kind of major disaster.”
While many investors do not believe the 20-10-5 trend exists, there are other investors who do pay attention to it. Simply put, this theory states that the stock market is in favor for 20 years. When the 20 years are over, the market crashes and for the next 10 years, commodities such as oil, gold, silver, real estate, oil, gas, and soybeans rise in value.
The 5 of the 20-10-5 cycle means that every 5 years some tragedy happens, such as the 1987 stock market crash
Early in my life, I did not really appreciate rich dad’s lesson on the 20-10-5 cycle. Nonetheless, I did follow his advice. Between 1973 and 1980, I was investing in real estate and gold, often categorized as hard assets or commodities. Some of you may recall the Hunt brothers taking silver all the way up to nearly $50 an ounce, and gold nearly hit $800 an ounce. Just prior to 1980, the commodities markets crashed. As predicted, from 1980 to 2000, the stock market dominated the world of investing. The disaster every five years seemed to be true also. Events such as stock-market crashes, the savings-and-loan fiasco, real estate crashes, and tragic events such as September 11, 2001, seem to occur every five years.
Not a Crystal Ball
The reason rich dad told me about the 20-10-5 cycle was not to make me a fortune-teller with a crystal ball. The reason he told me of this cycle was because he wanted me to be aware of change. One of the reasons so many baby boomers are in financial trouble with their retirement is because, instead of following the 20-10-5 cycle, their investments always stay in the stock market. Warren Buffett sold many of his stocks in 1996 and took large positions in silver prior to 2000. I do not know if he follows the 20-10-5 cycle, but his investing patterns seem to validate it.
The Fall of the Baby Boomers
If this 20-10-5 cycle holds true, then many baby boomers will not be able to retire because they will be in the stock or equities market, waiting for the price of their stocks to come back up, when they should be in the commodity cycle.
The way I learned to use the 20-10-5 cycle is not as a crystal ball, but as a reminder to look into the future. For example, in 1996 when gold was at an all-time low trading at around $275 an ounce, I began investing in gold mines. While I was laughed at by some of my friends who are in banking and the stock market, today they are not laughing as gold prices continue to rise.
In other words, as the 20-year equity cycle was coming to an end, I began moving out of equities and began looking for opportunities in commodities such as gold, silver, oil, and other metals. When September 11, 2001, hit, even though stock prices were really low,
I continued to stay out of the equities market just because I knew that equities had run their 20-year cycle. Instead of stocks, I looked for more real estate opportunities after 9/11, even though real estate prices were high.
Don’t Take This to the Bank
This 20-10-5 cycle is not something I would bet my financial future on. As I said, it is primarily a reminder that markets move in cycles. However, by knowing this, I tend to not get caught in the wrong cycle. One of the best ways to find good investments is to find investments that are currently out of favor but are soon due to come back into favor.
Since I love real estate, and I trust the demographic trend of America’s ever-increasing population growth, I will continue to invest in real estate.
In Japan, where birth rates are down, I would be hesitant to invest in real estate. Real estate property values only go up if there are people who want to rent them.
In Rich Dad’s Prophecy, I wrote about the possibility of a massive stock market crash between 2012 and 2020. The reason for this crash is not due to the 20-10-5 cycle, but more to the demographics of the Western world’s population. In 2016, the first baby boomers turned 70 ½ years of age and, at that age, the law that created the 401(k)-retirement plan in America required that baby boomers start to withdraw from their plans. That resulted in the sale of their equities in order to fund withdrawals when they will have to pay the deferred taxes on their accounts.
A Reminder That Things Change
Although I would not set my clock by this cycle, awareness of the cycle serves a useful purpose—to constantly remind me that markets change. It also reminds me to look for investment opportunities in different markets, rather than keep going back to a well that is dry.
Millions of investors lost money in the stock market between 2000 and 2003 because the 20-year cycle of stocks came to an end. Rather than follow the 20-10-5 cycle, many investors continued to sit around waiting in the stock market, rather than moving on to the commodities market.
It is reported that in 1996, Warren Buffett stopped actively investing in the stock market and quietly moved into the commodities market, investing in hard assets such as silver. In 1996, I too moved out of the stock market and moved into the oil and gold markets. Why? Because market cycles were changing. Just as the moon changes phases, so does any market.
Waiting for the Long Term
Millions of investors lose a lot of money in the stock market and still sit around waiting for the market and the price of their shares to come back up. That is a waste of time. Although the market will eventually come back, the market they lost their money in is gone.
If a person loses their retirement money in the fourth quarter of their life and they wait 10 years for the next bull market, they are wasting more than money. Instead of investing for the long term, they are actually waiting for the long term.
It makes no sense to me to invest for the long term knowing that one day Mother Nature can pull the rug out from under you. If you look at an individual’s game of money, let’s say they begin investing at age 25 and expect to get out of the game 40 years later at age 65. That means many people will have their money sitting on the table for 40 years. If the 20-10-5 cycle is somewhat accurate, this plan of investing for the long term is therefore a guarantee of losing.
If the stock market goes up and down in 20 years, then blindly investing for the long term for 40 years is a suicide mission. You are almost guaranteed to be a loser once, maybe twice, or even more during those 40 years.