The J-curve effect is a term used in foreign trade theory. It describes the effect that the real devaluation of a currency has on the foreign trade balance. Accordingly, the effect is negative in the short term, but positive in the long term.
The reason for this is that prices react faster than quantities. If a currency depreciates, it is worth less in a foreign currency, which is why import prices rise while export prices fall. Since the traded volume initially remains unchanged due to longer-term contracts, the value of imports rises - that of exports falls.
the trade balance verschlechtert sich zunächst. Auf längere Sicht jedoch führen die gestiegenen Importpreise zu verringerten Importen und die sinkenden Exportpreise zu höheren Ausfuhrmengen. Im längerfristigen Ergebnis führt dies oft zu einer positiveren Handelsbilanz als vor der Abwertung.
Anyone who builds a portfolio and invests in mature industries can expect the value of the portfolio to increase over time. For with every single title it can be expected that a positive price development will occur, albeit with fluctuations. Due to the diversification, the fluctuations in value of the portfolio are even slightly lower than those of the individual stocks.
The portfolio behaves somewhat differently if the money is invested in start-ups or in companies that are currently on the threshold of innovation.
In these phases, the risk for the individual companies is not expressed as a random fluctuation in further performance in a statistically measurable manner. The risk manifests itself in another form: on the one hand there is the risk of complete failure, on the other hand the chance of extraordinary success, which manifests itself in a few years through exponential growth.
Ein solches Portfolio, wir nennen es Private equity-Portfolio, zeigt deshalb einen andern, typischen Wertverlauf.
1. In the first and second year, drops in value are to be accepted in those companies that fail.
2. For those firms that do not fail, there are no drops in value, but the fact that they will "make it" (reduction in the discount rate reflecting the risk) and exponential growth will not become clear for three, four or five years however, already in the first or second year.
As a result, the value of the portfolio only suffers from the collapse of the failing companies in the first and second year, while the later successful ones (only one is not yet so sure of success) show a stable performance. Overall, the portfolio declined in value in the first and second year. Later, however, the exponential growth of the winners takes hold, and in the third and fourth years the rapidly increasing value in the private equity portfolio reflects this fact.
The J-curve effect describes the typical course of value for a private equity portfolio: In the first few years, heavy losses are to be accepted, in the years thereafter rapidly increasing value gains are recorded.
A private equity portfolio therefore requires patient investors who are familiar with the J-curve effect and who do not quit their involvement in the first two or three years just before the exponential growth of the winners manifests itself.
On the other hand, one should know that the J-curve effect describes the performance of a portfolio and not that of a single investment. Anyone who would like to continue an individual investment after initial losses with the reference that this is quite natural, as with the J-curve effect, fails to recognize the mechanics behind the effect.
The J-curve effect is important for the management of a company when designing the company portfolio consisting of projects. In many cases, the J-curve effect can be mitigated by delaying the start dates of the individual projects.