Alan Clarke: Bottoms up to bottoming out

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Over the past few weeks we've looked at the main issues around market forecasting and whether we can predict a boom or a bust. Of course, we could easily fall into the trap of using hindsight, the investor's worst enemy. Here's a new challenge - can we pick the bottom of a slump?

Ideally, we would all be able to pick the market's absolute low point and invest when things are really cheap.

We buy while the herd are panicking and selling, but there are two things we need to bear in mind before the slump.

Keep looking ahead

In our last four articles we discussed picking the top of a boom, and of course that's not easy. Let's have a quick recap.

Remember that 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 and done one or more of the following:

• Taken profits off shares.
• Sold one or two properties if you had several.
• Sold your large house and downsized.
• Sold your business or farm, or part of it.

If so, you should have a bit of ready money to spare. You cannot take advantage of a slump and low prices if you don't have cash.

Remember also that banks don't like lending in slumps either, so borrowed money may not be available.

Cash is king if you want to take advantage of low prices.

What are the signs that a slump is nearing its bottom?

• Mortgagee sales rising
• Unemployment rising
• The RBNZ lowering interest rates sharply
• Share market crashes (this usually happens first)

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 six months, a year or more after the bottom of the slump.

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 courage to invest when things are black.

It is well known that the fear of loss is much stronger than the euphoria of a gain.

Fear and 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 who did really well often bought more land or run-offs when things were bad.

Fear can be overcome by working the old adage: "If in doubt, do half".

Spend or invest only half your available cash, then wait for six months and reappraise.

Diversification or delusion

And of course, diversify and don't delude yourself either.

I saw an owner of five Auckland houses get cross when someone dared mention:

• Auckland is built on five volcanoes.
• New Zealand does sit on an earthquake fault line.
• New Zealand is horribly exposed to imported diseases.
• Auckland property prices are insane and mortgage rates are likely to creep up.

Not only did he get cross, but he wanted to shoot the messenger. Sorry, but this is my job and I tell it like it is.

In summary

• Start by cashing up some assets in boom times.
• Buy when others are selling.
• You can (partly at least) balance fear and greed by using an impartial adviser.
• Don't spend all your cash in one day.
• Half now, half later.

• 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.