We buy while the herd are panicking and selling, but there are two things we need to do before the slump.
In our last 4 articles we discussed picking the top of a boom, and of course that is not easy.
Remember the two key signs are:
· when the price of an asset rises very quickly
· when the masses are getting all excited about something “hot” and all piling in.
If you have used our “boom signs” and “action to take” checklists, you might have partially cashed out;
· taken profits off shares
· Sold one or two properties if you had several
· Sold your really big house and downsized
· Sold your business or farm, or part of it
Remember you cannot take advantage of a slump and low prices if you don’t have cash.
Remember too banks don’t like lending in slumps, so borrowed money may not be available.
So cash will be king if you are to take advantage of low prices.
What are the signs of a slump near the bottom?
Mortgagee sales rising
The RBNZ lowering interest rates sharply
Share market crashes – usually first as sharemarket tend to anticipate
Real estate tends to falls last, especially commercial property. This may be because tenants feeling the pinch vacate as their leases expire, which might be 6 months, a year or more later.
Fear is the other issue
I well remember the black days of March 2009 when it looked as if the global economic system could collapse. It requires some courage to invest when things are really black.
It is well known that the fear of loss is much stronger in humans than the euphoria of a gain. Fear & greed are normal human emotions, but fear is by far the stronger one.
But it works – an old stock agent of 40 years experience told me that the farmers he knew - that did really well - often bought more land or run offs when things were bad.
Fear can be overcome buy using the old adage “if in doubt, do half”.
Spend or invest only half your available cash, and then wait for 6 months – average in.
Diversification or delusion
And of course diversify, and don’t delude yourself either. An owner of 5 houses in Auckland got really cross when someone dared mention:
- That Auckland is built on 5 volcanos
- that NZ does sit on an earthquake fault line
- NZ is horribly exposed to imported diseases
- Auckland property prices are insane & mortgage rates are likely to creep up
Not only did he get cross, but he wanted to “shoot the messenger”. Oh well, that’s my job.
Start by cashing up some assets in boom times.
Keep cash in hand.
Buy when everyone else is selling.
Softly softy catchee monkey.
You can (partially al least) balance fear and greed by using an unemotionally involved adviser.
Don’t spend all your cash in one day.
Half now half later is a great tool.
Supplied by Alan Clarke, financial & retirement adviser, & author. He also writes regular articles for the media and on line.
His second book “The Great NZ Work, Money & Retirement Puzzle” is now available.
You can buy it on line at www.acfs.co.nz
Alan is an independent authorised financial adviser (AFA) FSP26532
His disclosure statement is available on request and free of charge.