Monday, May 24, 2010

Buy Low, Sell High

Well sure, everyone wants to buy low and sell high. The question is how to know what’s high and what’s low. If you are expecting an answer to that question, you will be disappointed, but I do have a technique that has worked well for me over the years.

I rebalance my portfolio whenever it needs it. Each month I develop a balance sheet and I check to see how far out of whack my actual investment allocation is relative to my “ideal.” If there is a large enough difference, I sell whatever I have too much of and buy whatever I need more of.

How do imbalances occur? Either an asset class has risen more than others (not a bad problem to have), or has fallen more than others. Sometimes one asset class rises while another falls. However it happens, when a significant imbalance occurs, I rebalance by selling the one that has made relatively more money (which is selling high, more or less) and buying the laggard (buying low.)

I try to keep as much of my balancing in my tax-deferred accounts to avoid immediate capital gains taxes. I also hold down fees and expenses by utilizing mutual funds (mostly index funds) rather than individual stocks. On Wednesday I’ll explain my preference for mutual funds over individual stocks.

~ Jim

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