Investment markets are prone to fashion whims, just like any other fad. If you don’t believe us then just think back a few years to kiwi fruit farms, Angora goats and “Anything Corp Ltd” shares (1980’s); film partnerships and high tech IT companies (1990’s); and from 2002 to 2007 residential property. Once an investment market becomes fashionable it’s usually time for canny investors to review investment fundamentals.

The first investment fundamental is to develop your own plan. We need to develop an investment plan that suits us – our time frame, our risk profile, our personality, our knowledge (or lack of), our resources, and our end objectives.

Before investing in any market you should have an investment plan that answers some basic questions, such as: 

• How much money do you have to invest now?
• Will you borrow (leverage) to invest, and if so how much? 
• How much money can you afford to invest on a regular basis? 
• Will you trade (buy and sell) or hold long term? 
• Do you want your money out at some point, and if so when? 
• Will you find/manage your own investments, or pay a professional? 
• Do you have specialised market knowledge? 
• Do you want to diversify your investments or specialise in a niche market? 
• What return on investment do you require? 
• Is passive cashflow or capital accumulation your goal? How much? 
• How many hours per week will you spend on your investments?

Once you are clear on your basic investment plan – write it down. A written plan enables you to revisit and fine tune your investment strategy regularly, ensuring you do not stray unintentionally from the original plan.

Most people tend to over estimate their capacity to handle risk and volatility. If you do chances are you will be selling at the wrong time – when the market is going down or has bottomed out.

Educated and sophisticated investors understand what the market is really doing and are usually comfortable riding out the lows. The goal of course is to become a counter cyclic investor.

A counter cyclic investor buys when most people are selling (the investment is out of fashion), and only sells when the market is rising or at its peak (the investment is hot!). It is very difficult and perhaps impossible to exactly time the market. However, counter cyclic investors buy or sell against the trend. They may miss the exact peak or trough, but they will still have bought or sold at roughly the “right” part of the cycle.

Most investments have their day in the sun and out perform other types of investments in the short term, but in the medium to longer term they are subject to the law of supply and demand. It’s a mistake to chase last year’s winners.

The herd mentality ensures that just as a particular investment is reaching its peak first time investors jump in (buying high). As the investment return peaks and starts to stall the counter cyclic investors will ease out of the market (selling high). Some time later the first time investors realise they have taken a hit and decide to get out (selling low). The old cycle of greed and fear takes its toll on the herd, but is used to advantage by the counter cyclic investor.

So how can smart investors use this investment fundamental in today’s property market?

Residential property in NZ enjoyed extremely strong growth from 2002 until 2007. Since 2008 residential property prices have started to drop across the board, but especially if purchased above market value during the boom and/or the vendors are in a hurry to sell.

As chartered accountants specialising in property we have seen many first time investors enter the residential property market during the 2002 to 2007 boom period – usually having no investment plan nor any understanding of how the numbers work. Many of these investors were negatively geared and on average family incomes…. a time bomb ticking away. It only takes a bit of bad luck and these investors are likely to become urgent sellers. And we all know that an urgent seller is a price taker.

Since 2006- 2007 canny property investors were tidying up their portfolios – perhaps divesting problem properties and/or properties where the numbers don’t work any more, maintaining their existing properties to maximise rentals, perhaps reducing debt or freeing up funds for future purchases. They were still looking for opportunities where the numbers worked, but cash (or spare equity) wasn’t be burning a hole in their pocket. They knew that there are always opportunities around, and that some great buying opportunities were likely to be coming in the next period. They were patiently positioning themselves for the slump period of the property cycle!

So, are you a counter cyclic investor? Is your investment plan in writing? Is it still relevant? Are you well positioned for the property slump and the buying opportunities it will provide, as well as the inevitable recovery?

Remember investing is a marathon, not a sprint. Prepare well and be patient.