How to buy low-ish and sell high-ish

By Mary Holm

Monday 22nd July 2002

You've got it all worked out. A certain portion of your savings is in shares or share funds, another is in property, another in fixed interest, and perhaps you're also in forestry, collectibles, emus, who knows what?

You've set this allocation taking into account when you're likely to need the money, and how much volatility you can cope with.

You expect to stick to this plan until a few years before retirement, or until you buy a house, or some other change in your financial situation.

Well done!

Then the markets move, and it all gets mucked up.

Let's say you had put half your savings into world shares a few years ago. They now make up only a third of your portfolio.

Meanwhile, the quarter you had put into collectibles has risen to about a third - perhaps partly because prices have risen and but also because the fall in world share prices has pushed up the weight of everything else.

A common tendency is to let this be, or even to push the process further.

For example, you might be tempted to sell the disappointing world shares and put more into collectibles.

That's not good thinking. You'd be responding to past performances. And research shows it's foolish to expect them to continue.

Assuming you set your original asset allocation with care, you should stick with it.

And to get back to it, you'll need to take a deep breath and buy more world shares and sell some collectibles.

There's a reward in this beyond just returning to your original plan. You'll also tend to do what every investor wants to do: buy low and sell high.

We can't say that absolutely, of course. International share prices might continue to fall for a while.

We can say, though, that current world share prices are low compared to recent years. It's likely that in a few years time you'll be well pleased you bought in mid 2002.

Similarly, if the value of your collectibles has risen, you may not sell at top price, but at least it will be a relatively high price.

Three tips about asset reallocation:

- Don't do it too often.

If you buy and sell every few months, you'll spend too much time and too much money on brokerage, fees and so on. Inland Revenue might also take an interest in taxing your capital gains.

Generally, asset reallocation should be done, say, once every two years, or when things get badly out of whack. But ...

- Don't react to big market moves.

Right after a market boom or crash is not the time for reallocation.

Wait a month or two for the market to settle. It will often backtrack, at least some of the way.

- Don't move all the way back.

In our example, your world shares have dropped from 50 to 33 per cent, and your collectibles have risen from 25 to 33 per cent.

Move back to, say, 45 per cent world shares and 28 per cent collectibles.

Why? There's half a chance the markets will be going your way anyway.

If you moved to 50 per cent world shares and then, soon after, price rises pushed that asset to more than 60 per cent, you would find yourself selling. And all that trading is expensive.

But if you stop at 45 per cent, the markets may than take you to around 50.

If, instead, the markets continue to fall, you simply buy more again next time you reallocate.

The idea is not to be precisely on target, but to fluctuate around the target, never getting too far away.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached at maryh@pl.net. Sorry, but she cannot respond directly to readers.

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