National economic development cycle and its stages

 First stage

In the first stage of the national economy, states are poor and citizens consider themselves poor. Many countries have not escaped this stage. The average income is poor and the standard of living is not soaring. People live hand to mouth and don’t waste their money. They have to spend a lot of time getting food and clean water. They have small savings and no one will lend them money unless international organizations do so. Everyone capable of leaving moves for more prosperous places. Citizens receive support from abroad. Birth rates are high. Average life expectancy is low. Corruption is a major reason why countries are not rising. Often countries are dictatorships.

For those countries, location and culture are of great importance. Significant natural resources facilitate opportunities to move forward. It will also be easier for those on the side of richer countries to move forward if they do not have to wage war against their neighbors. Belief in work, opportunities for better conditions in the home country and one's own development facilitate the development of people and the country. People are slowly earning more money than living from hand to mouth. They do so to improve their chances of surviving in the future and do not consume everything because they are worried about their financial future.

The low cost of labor enables countries to develop. Low birth rates ​​are common denominators. The number of employees in relation to the use of machinery is poor. The textile industry and similar labor-intensive industries deliver the best export products. Industry is taking advantage of obsolete machines in richer countries, whose productivity is nowhere near the level of the new ones. Focusing on price competition, usually foreign companies, operate in these countries due to low costs. They consider the risks to be the highest and want a high return on their investment. In general, countries also generate high returns. Old machines and other crap is being exported to countries that richer countries want to get rid of, such as decades-old vans.

Currencies are weak and nations do not have decent capital markets. The real values ​​of the currencies can be found on the black market and it is not worth relying on the official exchange rate. There are a few companies on the stock exchanges and there is no reliability on the financial statements. Foreign investors may be weak in disputes. Citizens who save money either invest in their own businesses or in real estate such as real estate. They believe their money is better safe than stocks or bonds. Countries are only suitable for a few investors.

Second stage

In the second stage, the state is rich, but the citizens feel poor. The behavior is not significantly different from the first stage, but the basic living conditions are better. There is less corruption, people are freer and dictators do not control the lives of citizens as much. Birth rates are higher. Food is easier to buy and clean water requires less energy and life expectancy is higher.

In this phase, personal savings and investment are growing rapidly. People have more money left to save and invest, which can be seen in e.g. on stock exchanges. The number and quality of machines to help with the work is significantly higher than in the first stage. People are motivated employees and work long hours. Exchange rates are often pegged to the reserve currency or to fixed assets such as gold. The economies of the countries are export-driven. They invest efficiently in industrial production. Competitiveness is high because wages are low and exchange rates are deliberately kept too low. Productivity growth will be rapid and debt will not increase too much relative to income.

Supply of many products in these countries is growing more slowly than demand, which is accelerating inflation. Nominal interest rates are not as high as inflation due to currency pegs. Everything is reflected in excessive investment and a balance of payments surplus. Eventually, states will have to switch to their own monetary policy. At the same time, capital markets are becoming more attractive. Private sector borrowing will begin and investors from both home and abroad will participate in the investment. New cities are growing, savings rates are high as revenues rise and foreign exchange reserves are growing.

These economies can be gold mines for the investor. Many of them are progressing to the third stage. It means decades of economic growth. According to Jim Rogers, one important milestone for the country is cutting the currency peg. It tells of the country doing well on its own. The market economy is working well enough. Bureaucracy should be minimal for the investor and adequate liquidity is mandatory. This may limit investments in major listed companies or indices.

Third stage

The third stage is the most prosperous for most nations. State is rich and citizens are rich, both in their own minds and in reality. Productivity growth is at its peak as citizens, businesses and governments invest in products and product development. Enjoying the fruits of work is the prevailing psychological state of affairs as citizens move into it from work and preparing for the worst of times. New generations have not experienced difficult times, so they do not understand the importance of saving and investing. Statistics show that this is reflected in reduced working hours and an increase in demand for luxury goods and services. They also put more money into necessities.

States are moving from net exporters to net importers. Foreign products are cheap compared to domestic ones, and especially cheap ones are imported. The investments of domestic industrial companies is growing in cheaper countries and it is moving away more and faster. Third stage countries and stock exchanges are seen as safe alternatives, which increases speculation in the financial markets by using leverage. The majority of the nations in this phase increase their military performance to advance their interests in the world. Few achieve the status of a dominant economic country. The rest will soon begin to decline and move on to the fifth stage.

Fourth stage

The fourth stage is for the country to become a leading economic nation. Only a few and selected countries do this. The fourth stage country has a reserve currency and its bonds are the best safe haven until the country moves to the next stage. In practice, a country does not have to be the richest, but its economy needs to be big enough to function as a ruling state. The phase lasts for about a lifetime. When a country acts as a holder of a reserve currency, it is a safe investment. However, the prices of assets cannot be forgotten.

Fifth stage

In the fifth stage, countries become impoverished, but citizens feel rich. The delusions of the latter are due to over-indebtedness, as incomes grow slower than debt. The limits of indebtedness are being met and must be reduced. The ultimate reason for this is that there are too few citizens who remember poor periods and the majority have not had to worry about the adequacy of money. Prices are rising when wages and consumption are too high. Savings rates are falling and leverage is rising. Real wealth is deteriorating, even though people think it is growing. Productivity growth will slow as investment in product development, infrastructure and capital-intensive products declines. Competitiveness is deteriorating and deficits are growing. Some countries in the phase are also investing in warfare to protect their own interests.

Economic booms and busts are more common in the final years of a phase because people live in the success of the past and believe the future will match it. The reality is hard to accept. With revenue growth and investment returns lower than debt service costs, the booms will be effectively wiped out. The losses brought about by the collapses are accelerating the downturn. The value of the currency depreciates, destroying the ability to pay debts. Finally, the countries will lose their status at the end of the phase.

The debt burden and the downturn of the nation are facts. Debt repayment is causing a negative self-reinforcing trend in which private sector consumption and wealth are declining. Government debt and deficit are rising. They are paid with central bank money printing, which lowers real interest rates. At the same time, the currency is weakening. Nominal GDP is growing faster than nominal interest rates. This is done to reduce the pain of paying off debt. Investment returns are low due to weak currency and deteriorating economic conditions. States start to compete against weaker nations. The superpower positions are disappearing from countries that were once successful economies. The likelihood of totalitarianism increases when citizens find themselves impoverished.

National economic development cycle, a short introduction

Ray Dalio has divided national economies into four different stages of development. I will use his assessment, but I will add more to the phase of the country that dominates the world economy. This position encounters few countries and even less often the same country reaches it more than once. Every economy has started from the first or lowest level of development which means that the country is poor and its citizens feel poor. Few countries reach the top level, the dominant economy in the world.

Most third-stage nations do not reach this stage. They jump straight to the fifth. The paths contain similarities and the same cause-and-effect relationships, but no country follows exactly the same path as the others. The levels will remain for decades and their changes will not happen fast. Each phase includes both ups and downs and booms and busts. Psychology contributes to the rise and destruction of nations or to their own level of development. It has five levels:

1. A poor nation that feels poor
2. A rich nation that feels poor
3. A rich nation that feels rich
4. A country that dominates the world economy
5. An impoverished country that feels rich

Stages are estimates of how the government and citizens, on average, see things. In many countries, individual provinces, geographies, cities, and residents do not feel that their state is at the same stage as the majority. Often the capitals of countries are richer than others which can be due to many things like corruption in poorer countries. The definitions are not clear. They are based on the opinions of the person making the assessment, with the exception of the country that dominates the world economy, which is self-evident to almost everyone.

The foreign investor needs to look at the transitions between stages. They last for years or decades. The functioning of a market economy increases as nations develop. The opposite trend is likely on the downside. The cause-and-effect relationships of transitions are not simple. Their effects often last for decades. Moving from a lower level to a higher one can mean a long period of favorable economic development. It is reflected in increased returns for investors. Dropping to a lower level weakens the expected returns. Changes are difficult to detect without visiting the country. This is especially true for lower tier countries. Reality and the outward image are not always close.

A long psychological / socioeconomic cycle part 3. Investing and the cycle

 Why are different phases and archetypes important for the investor? They tell about the rhythms of the past and the future. The time periods are not duplicates, but they have similarities. Phase identification increases the likelihood of estimating what may happen in the coming years or decades. This applies to both life and investing. At the same time, it increases the likelihood of better understanding and better responding to world events. In addition, the outcome of the Crisis indicates that most of the next cycle will follow the outcome. The emergence or non-emergence of totalitarianism determines the opportunities for people, companies and financial markets to produce prosperity.

In the following sections, I review the financial characteristics of different phases that are important to investors, price changes in different asset classes, etc. It is difficult to find historical prices for asset classes beyond a hundred years, so statistical significance is low. Careful interpretation of the historical prices of asset classes must be taken, in order to make better conclusions.

High

The economic characteristics of the High that reflect the Crisis are favorable productivity growth if the Crisis has not led to leftist rule, high taxes on individuals and companies, large infrastructure projects, a new leading economic nation, an emphasis on a unified culture, mostly positive economic growth, and a reduction in stock market volatility. The latter most likely apply to the first decade of the High. In addition, during the High, the largest age groups in the new cycle are likely to emerge, replacing the largest age group in the previous cycle. The departure of the latter will significantly reduce pension liabilities.

During the High, the highest personal tax rates inherited from the Crisis are insane compared to today’s world. They are likely to be well over 50%. The percentages depend mostly on the magnitude of the destruction of the Crisis and the people rising to power. Depending on the nation, corporate taxation of profits can also be more than 50%. High taxes will remain through the phase and the change will then be in a lighter direction until the end of the Crisis. Change may not be slow. High taxation is needed for massive infrastructure projects, such as the possible modernization of energy production and the construction of new roads. Investor tax planning is important during the High. The long-term investment horizon is the most preferred because of taxes.

As the economic winner of the Crisis is allowed to create new rules for the world economy, it will have the greatest influence on the possible change in the reserve currency and the creation of the new worldwide economic organizations. This applies to Crises with global implications. The new reserve currency is most often pegged to precious metals in this phase, which can mean, for example, a fixed price for gold for decades. It can also lead to the decline of precious metals. These can happen during a Crisis, so it is uncertain whether any individual will keep it in storage. Gold may not be eligible for investment.

Of the asset classes, commodities may be more expensive than historical averages in the wake of the Crisis, but their price trends during the High will move downward. In the beginning, interest rates on bonds are usually lower than average, but they are rising. Property prices are special in that they don’t depend much on the stage of the cycle. They are on a sharp rise at some point during almost every phase. The intervals between their peaks are 15-30 years. In a market economy, stock prices rise more evenly than in other stages of the cycle. This is one of the best times for a long-term equity investor. The most favorable development will take place a decade after the beginning of the phase and the average price fluctuations will be smaller than in other phases. This is partly because the memories of the Crisis are strong in the nation and collective insecurity is present.

Companies have good opportunities to succeed in at least the following industries: infrastructure construction, all industries related to children, and all products and services that emphasize coherence. For example, market leaders are likely to increase market share because people want to consume the same products and services as others. The position of monopolies or oligopolies is hardly challenged during the phase. Finding them on the stock market can guarantee higher than average probable returns for a couple of decades. These can be state-owned companies. Equity investments should be considered as long-term investments if it is possible for the age of the investor.

Awakening

The investments and returns of the Awakening will be affected by the events of the High and its progress. One major change is the entry of the largest age groups into the labor market. In this case, the real estate market requires additional investments and at the same time prices may rise. With larger families, larger apartments can be traded better. Infrastructure inputs investments will decline compared to the High. At the same time, prices for construction-related raw materials may rise.

The steady growth that began during the High decline badly at least once during awakening. This has been the case in the United States during the last four Awakenings. Inflationary pressures are rising as large age groups consume more consumer goods and services. Although the last time it was hit by high inflation, it is not the only possible outcome. Deflation can strike. Coupling between the reserve currency and real assets may break. In that case, investing in the latter is a viable option. At the same time, government bond yields are likely to soar for a long time to come.

The Awakening is not the golden age of the stock investor but vice versa. Real dividend income can go into the red. Companies are not seen as an important part of the economy. During that time, companies related to culture, spirituality and drugs are doing well. Mass events can be good investment targets. Intoxicants, both legal and illegal, are more popular than in other periods. It is worth putting your money in the companies that sell them legally. Financial market developments fluctuate.

Unraveling

During the Unraveling, the probability of the economic boom or bubble in a person’s lifetime is the greatest. There may be several, but one of them is larger than others. The largest one is not always related to stocks, although it was during the previous two Unravelings. The stock bubble is not always the most destructive. The absurd consumption of external signs of wealth is the most significant feature of the phase. Consumption binges are visible everywhere. They appear as expensive consumables, expensive individual products, etc. At the same time, the nation can become indebted.

Even in a Crisis, it will take a long time to find out the devastation of the boom or its eruption. The period has far-reaching implications. They appear e.g. as the largest inequality. The devastation can only be solved after the end of the Crisis. Belief in new, life-changing consumer technologies is high and the public can buy them massively. The number of companies related to the boom is the highest. Most new technology companies crash, but the best ones remain. The prices of their shares will fall after the crash of the stock market bubble. Some will return to pre-crash or higher prices, but it will take a long time.

The phase may be the golden age of the banks as individuals become indebted when they participate in the boom. This can be reflected in high property prices. Bank bubbles are possible. They normally burst at the end of the deleveraging, so care must be taken when investing in banks. Bond interest rates may be high at first, but will go down thereafter. When this happens, bonds will be a great investment for a long time. Any asset class can experience a bubble.

Crisis

The whole Crisis may go into the aftermath of the economic problems caused by the boom of the Unraveling. It is accompanied by gloomy economic developments such as collapsing financial markets, high unemployment, deflation or hyperinflation, state insolvency and over-indebtedness of other economic actors, a maximum of economic inequality reflected at its worst in violence, protectionism, poverty and mass unemployment. The problems are great and require significant change. Towards the end, investor tax planning becomes important. Society realizes that economic equilibrium between incomes and costs cannot be achieved without higher taxes. This is especially true during wartime.

Techno-oligarchs are one hallmark. A possible technology bubble has burst and the winners will be able to enjoy the fruits of their labor. Domestic companies are doing better in the internal market thanks to protectionism. This means an increase in market shares in consumer-driven societies. On the other hand, consumption is declining compared to the Unraveling, as the largest and most prosperous age groups are retired and their consumption is lower than during the previous phase.

The regulation of financial institutions will increase through this phase in the event of a banking crisis in the deleveraging. Regulation follows decades of development. Companies with significant tax-deductible losses may be better-than-normal investment targets if taxes start to rise. Healthcare and other industries related to large numbers of elderly people are likely to be a good investment.

The outcome of the Crisis is reflected in the social system of the new cycle. It is one of the most important parts of the success of the national economy, as it affects both productivity and the number of people in the working age groups over the next cycle. Economic growth is, in effect, the sum of the former, although it may be affected by indebtedness in the medium term. In developed countries, the long-term development of productivity growth in an economically viable system is about 2% per year. Productivity growth in less prosperous countries will be bigger than that figure in market economies. The number of workers is affected by both the birth rates and the migration to or from the country. For the index investor, these are the most important pieces of information.

A long psychological / socioeconomic cycle part 2. Phases

The phases of the cycle last 15-30 years. During the Civil War, the crisis lasted only five. The change of phase can be either a clear and eventful event or a gradual and ambiguous event. Each phase leads society towards the next. A new cycle begins after the Crisis. The previous cycle ended at the corners of 1945 and the current cycle then began at the High which ended during 1963. The subsequent Awakening ended around 1983 and the subsequent Unraveling most likely ended in the great financial crisis of 2007-2008. Since then, society has lived through a time of Crisis that is likely to end in the corners of 2030.

The High will begin once the main problems of the crisis have been resolved. The damage caused by the Crisis will be repaired for a long time during it. Society is slowly rebuilding itself. At the start of the High, the majority does not believe in the future. The mood is slowly rising. Faith in the future will improve to the end. The majority despises individuals they consider selfish. Self-confidence is low and group pressure influences decisions more than at other stages. The role of institutions is growing and they are expected to guide society. Birth rates are usually highest during the Peak. Family values are strong and the number of differences is low.

Awakenings are the times of the Cultural Revolution and the spiritual rebirth. People invest the most effort in developing their values. The role of institutions is diminishing and social disorder is growing. Crime statistics do the same. Demonstrations are becoming more common and some of them are causing riots. Children feel insecure and family values are declining. People are the most creative and creativity focuses on spirituality. At the end of awakenings, social orders disappear and individuals believe their inner values have improved. New values have replaced old ones.

At the start of the Unraveling, people are happy. Belief in the future is high, but at the end of the phase it will darken. The rhythm of life is fast and people think about the present. This is a time of abundance and selfishness. Confidence in governance and common institutions is low, as is morality. Spirituality is diminished, but the people are prosperous or feel that way. During Unraveling, the probability of the largest economic bubble in a lifetime is greatest. Often its consequences are corrected throughout the Crisis.

The Crisis often begins with a rumble. The mental state of society is changing rapidly. Inequality peaks. As the Crisis begins, People are divided, but it will not last indefinitely. Unity and peer pressure are intensifying towards the end of the Crisis. People see themselves as a continuation of a group more than as an individual. Institutions are changed and directed against a common enemy. Xenophobia is at its strongest and wars are likely. They are either against an external or internal threat. Civil wars hardly occur at other stages.

During Crises, responses to threats are often extreme, whether external or internal. Every effort is being directed against a common enemy. This creates tremendous destructive power and an extreme end result. The Crisis is the most important stage of the cycle. Its outcome determines the next cycle, creating a new personality for society. The end result is either freedom, totalitarianism or dictatorship. It is difficult to predict. The Crisis is closely linked to both the long debt cycle and the cycle of the leading economic country. The winner of the crisis sets the rules. This applies to internal and external relations, social relations and the economy.

A long psychological / socioeconomic cycle part 1, Introduction and generational archetypes

The psychological state of emotion follows a cycle that changes society. Its driver is the aging of generations/archetypes. History creates and modifies them. Generations age and shape states. In this book, I use the cycles and the generations/archetypes found in Neil Howe´s and William Strauss´book ”The Fourth Turning”. it is a must read to anyone who is interested in this cycle. There are four types of generations and they progress through the same four stages of life and cycle from cradle to grave in their own order. Investing is so much about mass psychology that the cycle cannot be ignored. Generations and stages of the cycle affect the prices of asset classes and their returns. Both affect what kind of companies are most likely to succeed in certain stages. The cycle is intertwined with a long debt cycle. I will go through the basics of the cycle before telling about its impact on investors. The cycle has four different stages from the beginning until the end:

• A High

• An Awakening

• An Unraveling

• Crisis
  
  
  

The cycle lasts approximately the average lifespan. Life is divided into four different stages: childhood, young adulthood, middle age, and old age. They last an average of about 20 years. In addition, during the cycle, there are four different archetypes, which are almost always generated in the following order:

• Prophets

• Nomads

• Heroes

• Artists

I focus on the United States, its stages, and archetypes. In the last few centuries, one archetype has never been born, and this happened during the Civil War, when the Heroes did not have time to be born. The focus on US cycles is due to two reasons: the first is that it is the most important national cycle to the investors around the world, and the second is that it is difficult to get accurate information about China, even though it is almost as large an economy. The US cycle is progressing almost as well as the whole of Western Europe and this phase is likely to overlap strongly with China.

Archetypes affect different stages and different stages affect different archetypes. As the majority of one generation lives in their last years, a new generation of the same archetype begins to emerge. Prophets are the opposite of Heroes. The contrasts apply to the Nomads and the Artists. The same contrasts fit the experiences of generations at different stages of life. For example, parents leave Nomads on their own in their childhood and Artists are guarded like the Fort Knox. A new archetype begins to emerge shortly before the new phase occurs.

The contradictions also follow different stages. Highs are close opposites to the Unraveling and Crises are close opposites to the Awakenings. The destructive power of Crises at the end of the cycle is a necessary evil. It renews social structures and social relations. Destruction is possible when almost everyone who has experienced the previous Crisis has died. Each step is similar to the same step in the previous cycle, although they are different. The dominant archetype at each stage reflects their life experiences. This leads to the progression of the different stages of the cycle. The best signs of change in stages are the increased intergenerational contradictions in the transition from one stage of the cycle to another.

Archetypes/generations

The majority of the archetypes have their own common characteristics. In addition, each archetype has an impact on the others during different stages. Everyone in each sees similar events at the same stages in life. The majority of them think the same about families, the fundamental pillars of society, political leaders, and the future. Majorities of each archetype react to life events in a similar way. The biographies of the archetypes resemble each other.

Prophets spend their childhood less protected during the Peak. They are selfish young adults in the Awakening. Their middle age goes by cherishing moral principles in the Eruption. Old age is mostly led by the Crisis. It is either a significant victory or a failure. Some of them will survive until the new High, but their significance is then minor. Their leadership moments during the crisis will have a significant impact on the next cycle. The younger age groups see them as selfish, proud, and cold-blooded. They focus on dreams, values ​​and spirituality. They affect the Heroes the most. Donald Trump and Steve Jobs are examples of the Prophets.

Nomads spend their childhoods unprotected in the Awakening. They are underestimated as young adults in the Unraveling. In a Crisis, they are acting as middle-aged pragmatists and their role in resolving it is being forgotten. The majority of them are forgotten as the elderly, although some of them are in leadership roles at High. Some survive to the new Awakening. Others see them as pragmatic, immoral, and soulless. They focus on freedoms, survival, and honor. They affect Artists the most. Jeff Bezos and Elon Musk are examples of Nomads.

The Heroes spend their protected childhood during the Unraveling. They help resolve the Crisis as young adults under the guidance of the Prophets and the Nomads. They become brazen middle-aged people at the top. During awakening, they play a strong role as the elderly. Some of them will survive to the new Unraveling, but they will not matter much. Others see them as selfless, capable, and machines. They focus on society, technology and success. They have the greatest influence on the Prophets. Mark Zuckerberg and Thomas Jefferson are examples of Heroes.

Artists spend their overprotected childhood during the Crisis. Careful, young adulthood goes at the High. They are indecisive middle-aged during the Awakening and settle into the position of the younger generations as the elderly in the Unraveling. Some Artists will survive to the new Crisis, but they don’t matter much. Others see them as indecisive, open-minded, and emotional. They focus on professionalism, legal security and diversity. They have the biggest impact on the Nomads. They often have the best opportunities to invest and good pensions because they enjoy the wealth generated by the largest age groups. Their birth rate is low. They are particularly benefiting from rising house prices. Thomas Edison and Warren Buffett are examples of Artists.

National economic cycles

 Cycles related to national economies include the long socioeconomic / psychological cycle, the cycle of economic development, the cycle of the leading economic country, the long debt cycle and the short debt cycle. The first four cycles may be strongly interlinked, as is now the case in the United States. The situation is exceptional and happens about once a century in a maximum of two individual countries. Now it only happens in the United States. A short debt cycle works within a long debt cycle. Economic cycles are most important for index and long-term government bond investors. The more an investor focuses on the activities of individual companies, the less he needs to take care of the national economy and its development.

There are four components to economic growth in advanced economies: productivity, the long debt cycle, the short debt cycle, and politics. In the long run, economic growth is based on changes in productivity and the number of working age population. Policies generally do not play a major role in the short-term productivity of advanced economies. Most political agents do the same things, even if they sell it under a different name. Politics has only a meaning when there are significant forces of change in the social system. This happens on average once in a person’s lifetime. Major changes in the social system follow the socioeconomic / psychological cycle. Birth rates are also wrapped around it.

The long debt cycle is also wrapped around the socioeconomic / psychological cycle, but short debt cycles have little to do with it. They mainly produce fluctuations around average economic growth. This is mainly reflected in productivity. It is impossible for people of working age to be cloned, for now. The policy influences fluctuations mainly by regulating the state and municipal loan taps, but there are no long-term changes in productivity. The main reason why politics doesn’t matter is the basic features of man-made systems. The outputs of political systems rarely change.

The current situation requires further reflection. Therefore, there is also a part in a book which describes how the long-term cycles intertwine. In it, I discuss the similarity between the long-term debt cycle of the United States, the psychological / socioeconomic cycle, and the cycle of a leading economic country. They intertwine in a way that affects the world. It is a pity that no one knows the exact effects in advance. That’s why I focus heavily on the current situation and guess what might happen. I have a better view of the first one. With regard to the latter, it can be said that my crystal ball is fuzzy.

Bubbles, Booms and Crashes part 7. I found one, what should I do?

When a bubble or boom is found, it is clear that most investments are too expensive. It is difficult to recommend any investment. Using leverage is even less recommendable. Extremes can last longer and grow higher or decline lower than anyone thinks. They are unpredictable and not easy to predict. The peaks and crashes of bubbles and booms may seem clear in retrospect, but few succeed in predicting them. Don’t try to time peaks and crashes.

It does not mean that you should not do anything. Bubbles and booms are good moments to consider selling investments that are too expensive. Not everything is worth selling at once. It may make sense to diversify your sales of the most expensive investments. This makes sense because prices are rising higher than expected. Tax consequences should be taken into account. At the same time, people can sell their loss-making investments to reduce taxes.

Uniform proposals cannot be made for all asset classes. For example, more time should be set aside when selling houses. They are not worth buying unless you get them really cheap. The same applies to other real estate. Easy-to-sell assets such as securities require a more individual approach. Short selling, i.e. the sale of other people´s securities, is difficult to recommend because of their negative risk / reward ratio. The profit can be 100%, but the loss can be several hundred percent. Options that take advantage of price reductions are another matter, but my expertise is not enough to make any suggestions.

Once a bubble or boom is identified, the investor´s cash reserve increases, because it makes sense to start selling little by little. The buying should not be rushed. As cash reserves grow, you have to be patient as temptations to participate in the boom increase as prices continue to rise further than expected. You can pay off your debts if you have them. At the same time, it is worth increasing cash position, because sooner or later prices will crash. Then you get good investments with low prices. Lack of cash in a collapse lowers long-term investment returns. Everyone should match their money supply to their needs. For example, the age of the investor matters. The older the investor, the smaller the portion of the assets is worth investing in. There are plenty of other reasons, but I won't go into them in more detail.

The crash is a good time to buy. It may take a long time for the bubble to move from the top to the bottom. Smart money makes sure it gets to sell as much of its bubble-priced assets as possible to others. It can take years to profit from being right. Prices are also falling lower than anyone expects. Crash of more than ten percent or more than fifty percent are normal in equities and in alternative investments such as commodities and currently popular cryptocurrencies. I do not recommend the latter to anyone as they may become worthless.

In crashes, it makes sense not to sell everything fast and it is not worth trying to predict the bottoms either. They can take years or decades before prices return to the previous peak. There is no hurry. Although the rise may be rapid at first, prices will remain far from previous peaks for longer after the bubble. Tax consequences can also be considered during collapses if possible. Cash reserves during crashes are useful, because you might have to sell your best assets during them. Nobody will buy your worst investments during them.