Alan Clarke: A bust often follows the good times

we should look for common-sense signs, and then avoid being over exposed to any one sector or asset class. Photo / Thinkstock

In an ideal world, we would be able to predict the top of a boom, and then we could alter our investments and assets accordingly.

But can we? Are there any reliable signs? Do we know of anyone who has consistently forecast the top of a boom?

This is really a work in progress, since it is far from easy to come up with a checklist that is foolproof. In fact, we would all be fools if we thought we could.

Rather, we should look for common-sense signs, and then avoid being over exposed to any one sector or asset class. Perhaps the biggest signs of a boom are:

*The price of any asset rises very quickly
*The masses are excited about something "hot" and all piling in.

Gold rush mentality
I remember a person who had "property fever" in 2006 and 2007.

My wife had heard of a potential property bargain and mentioned it to him. She said it was as if he was possessed, and he had "gold fever".

The herd was buying property in 2006 and 2007 and he was leading the charge. He was heavily into geared property, but not long after the 2009 crunch, he suddenly left town. He didn't do the opposite of what the herd was doing. In fact he was a "flashing sign" for those looking for the warning signs of an unsustainable boom.

The west coast
I have seen gold fever in the West Coast of the South Island at the whitebait season - and, at up to $100 for a kilo of whitebait, you can see why.

They are great people, very friendly too, but their gold fever is a fascinating human condition to observe.

Go there in September or October and enjoy their fabulous hospitality, the whitebait of course, and observe the gold fever first hand. Great fun and quite enchanting.

Think back
Remember tulip bulbs, they were all the rage in Holland and elsewhere, but the boom and riches did not eventuate.

Ostrich eggs @ $4000 each
Another fad that came to very little. The only people who made any money were those who (cleverly) promoted the eggs, and then got out early.

Kiwifruit in the 80s
In Kerikeri they say, "how do you make a small fortune in kiwifruit? Start with a large fortune."

Many survived only by subdividing land and selling it.

Gold
Many people convinced themselves that gold was the thing to have in 2010.

Even though most were not economists, they felt the world must surely collapse when the US started to print money.

Gold rose to $1800 and is now back around $1250.

Ouch, someone lost money.

Fine to have some, but to take a big position is a big gamble.

In 2009, global shares were well out of favour, and avoided by the herd - they did not look "hot".

However, they have risen by about 50 per cent since 2009 (in New Zealand dollar terms).

A classic example of doing the opposite to the herd.

The millionaire makers
A very big organisation in Australia from 2005 to 2007 was known as the "millionaire maker". It had advisers on huge commissions running around going crazy, and its clients were making 30 per cent, 40 per cent, 50 per cent very quickly.

But it all fell apart in 2009, and very few of its millionaires were left standing.

Now the Australian Securities and Investments Commission (Asic) has ordered "millionaire makers" back to the clients to clean up the mess.

Learn from past
If we don't learn from the past, we are destined to repeat it.

The key indicators
*Look out when the price of an asset rises very quickly.
*Look out when the masses are getting all excited about something "hot" and all piling in.

Readers are welcome to email me with their comments & additions to such a checklist.

Alan Clarke is a financial and retirement adviser and author. His second book, The Great NZ Work, Money & Retirement Puzzle is available 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.