'Buy low and sell high': The wimp's guide to investing

By CHET CURRIER, Published February 21, 2007

STANDARD everyday financial advice would be a lot easier to follow if it didn't contradict itself so often. One basic precept tells us, 'Buy low and sell high'. Then another admonishes, 'Never try to time the markets'. This may help explain why people act so confused as they go about the business of money management.

Now, I'm as puzzled by life's paradoxes as the next guy. But I can suggest a way to wriggle out of this particular dilemma.

To buy low and sell high without market-timing, one need resort to nothing more than a simple old mechanical exercise known as portfolio rebalancing. It's so easy even a computer can do it.

There is nothing bold or macho about rebalancing. On a swashbuckling scale of 1 to 10, it ranks about a 0.5. It gets much higher marks, however, for such other virtues as discipline, prudence and consistency.

Every once in a while, say at the beginning of each new year, an investor adds up the current market value of the various asset classes among his holdings - stocks, bonds, money markets, and so forth. Some savings plans encompass just those three basic asset classes; others may include real estate, commodities, hedge funds and so forth.

Once the totals are summed, the investor matches them against the intended percentages in his asset allocation plan.

Once a year

'You should review your portfolio at least annually, and rebalance it if your allocation of stocks and bonds has drifted from your target by more than five percentage points,' says the Vanguard Group, which manages US$1.1 trillion in mutual funds, in a current client newsletter.

If securities markets could be timed with any reliable expectation of success, there would be no need for rebalancing - or asset allocation for that matter. You could just buy whatever was bottoming out at the moment, sell it at the next top, and continue rapidly along the Road to Riches.

Timing, alas, is very hard and fraught with risks. So instead, most careful investors adopt a diversified plan of allocating their assets. It might call for 50 per cent in stocks. - Bloomberg