Easier said than done, buying low and selling high is an attention-grabbing concept that we all want to put into action. Here’s a sure way for you to sell high and buy low that was offered to us by Chuck Jaffe back in the spring of 2016. His article is a perfect primer on portfolio rebalancing that requires “selling winners and investing the proceeds in laggards”, but it’s the Judith Ward quote within that best sums up everything we aim for:
“As an investor, you should have a target asset allocation that is going to help you reach your goals and that will be appropriate for you from a risk-tolerance perspective. Rebalancing makes sure that you get your portfolio back to that target allocation,” said Judith Ward, a senior financial planner at T. Rowe Price Investment Services. “It’s counter-intuitive – because it means you are moving out of things that are doing well into things that aren’t doing as well – but when you think about it, you are selling high and then buying low.”
The Starting Place: A Diversified Portfolio
It all starts with a diversified portfolio. In short, a diversified portfolio spreads out your investments among many different investment vehicles from stocks and bonds, to real estate, to speculative investments like crypto. You should decide on percentages that match your own risk tolerance. For example, the younger you are, the more time you have to recover from potential losses, which means you can afford to take more risk. On the other hand, for anyone at the other end of the spectrum approaching retirement, the equation gets turned on its head and the appropriate allocations fittingly inverted as the desire to minimize risk increases. The classic “balanced” portfolio lies in the middle, and assigns a more or less equal weighting to 5 principle categories as seen in this pie chart from Forbes.
Of course, crypto should only be a fraction of your total net worth - indeed just a fraction of the speculative subcategory within the “Alternatives” piece of the pie - just as you’re diversified on the macro level, each investment class itself needs to be diversified within: stocks into blue chips, mid-caps, and growth, for example. Your crypto portfolio, that 5% of your total net worth, for example, should be equally well diversified within.
The Key to Success: Automatic Rebalancing
Once you’ve reached the point of having created a clearly defined portfolio, you move on to automatic rebalancing. This is where we get into the meat of what this means in terms of buying low and selling high.
Let’s say you have a relatively risky crypto portfolio in the sense that your diversification is rather restricted since you’ve only invested in 10 different cryptos, and then let’s say that you’ve given each an equal 10% weighting and further decided that you’ll rebalance whenever any individual crypto gets between 5-10% or so away from its original 10% weighting (reaching a total of 15-20% or more of the total portfolio). Then you sit back and do nothing until you’ve got an investment that grows to 15-20% of the total portfolio, and then, once that happens, you simply sell enough to bring it back in line. You then use the proceeds to bring laggards back up.
That’s it! In its most basic form, it’s quite easy, there’s nothing to it, and you’ve greatly reduced your overall risk at the same time that you effortlessly buy low and sell high.
Positive Side Affects: The Elimination of Emotion and Complications
If you’re at all like me, your biggest challenge is that of controlling your emotions: keeping euphoria in check at the tops, and avoiding despair at the bottoms, so that you keep yourself from doing exactly the opposite of what you should be doing. A balanced portfolio is your best friend when it comes to managing emotions.
But, unfortunately, the challenges don’t end there. Who is really expert enough to be able to know when to buy and when to sell just by reading the charts? Or by listening to experts and analyzing fundamentals? Even the best of traders will tell you that they are wrong more often than they are right! They are the first to admit that they only make money by quickly selling losers and letting the few winners run!
The complications are numerous. Who among us is good enough to even know where to put those famous stop loss orders? And with a crypto stop loss that is often executed many a percent away from where you set it?
Who would want to mess with any that if you didn’t have to?
Automatic portfolio rebalancing eliminates all that, frees your life up for other things, and lets you sleep like a baby at night, and all the while you’re buying low and selling high!
A Simplified Crypto Example
Let’s say that with 20/20 hindsight you made the almost brilliant purchase of an equal $1,000.00 amount of ETH, DASH, XMR, LTC, XRP, ETC, XLM, STEEM, BTS and SYS on January 1 of 2017 – a 10% allocation of a $10,000.00 investment to each.
Today your portfolio would look like this in USD valued percentage terms:
ETH ~16.3%
DASH ~15.5%
LTC ~13.3%
XRP ~12.9%
XLM ~11.9%
BTS ~11.3%
SYS ~8.3%
XMR ~4.4%
ETC ~4.1%
STEEM ~2%
Do you see any major imbalances? Where would you go from here? Do you see any no-brainers? This hypothetical investment would now be worth $532,728. You’d have a lot of money to be skimmed off of ETH and DASH to put into STEEM (XMR and ETC too, if you wanted to continue with them), around $63,000 to “redistribute”, and all without ever looking at a chart – in spite of the fact that looking at the charts would probably make you much more comfortable with your “trade”!
And you’d just have bought low and sold high in the process!
Related resources for those who wish to go beyond this basic introduction.
https://www.investopedia.com/university/risk/risk4.asp
https://www.fidelity.com/viewpoints/guide-to-diversification
https://www.investopedia.com/terms/r/rebalancing.asp
https://www.investopedia.com/investing/rebalance-your-portfolio-stay-on-track/
https://www.reuters.com/article/us-column-stern-advice/how-to-force-yourself-to-buy-low-and-sell-high-idUSKBN0GD1MV20140813