Several times a day I have the same question put to me. Is it time to climb back into the share market? And frankly there is no yes/no answer.
When share markets are high, we often suggest that investors take a profit. That doesn’t mean you sell all your good stocks that have done well. It means that selling a few off the top locks in some profit – reduces the average cost of the remaining shares you hold in that company and better protects you if there should be a downturn. It may be that it makes sense to take a profit on a certain stock on several occasions.
When stocks are well down – like right now – investors seem to think they have to either stay right away or climb back into the market in a big way. They are ignoring the very sensible process of dollar cost averaging.
Dollar cost averaging happens when an investor decides how much he or she wants to invest in a certain company, then moves towards that goal with a series of purchases.
Say for example XYZ Ltd was currently trading at $5 – an all time low. An investor may decide to buy say 3,000 shares. In these uncertain times it makes sense to buy say 1,000 shares right now and two parcels of 1,000 at later dates.
In that way – if the price continues to fall the investor has the opportunity to average their price down and if the price moves upwards they have bought one third of their proposed holding at the bottom of the market.
So it’s not a case of all in or all out – it’s a case of taking a sensible approach.
Right now the financial market place is the most difficult I have known in 30 years in the industry. But difficulty means volatility and volatility means opportunity.
In the secondary fixed interest market there are securities in good companies trading on yields up to 20% – such is the lack of confidence in that sector.
The share market has fallen right across the board and yet some of those companies are performing well and have good prospects.
As one commentator so aptly put it – Buying last year was like buying in the days before Christmas, buying today is like buying in the Boxing Day sales.
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Somerset Smith Partner’s disclosure-statement. (PDF 1.1mb)
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