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Buy Low: Sell High—Great Advice, but Is It Really Possible?

| January 07, 2010
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If you look at the major U.S. market indexes over the past decade, they aren’t just flat - they headed south. So you would probably agree that the old buy and hold strategy isn’t looking too attractive these days. However, there is an even older strategy that has been successful: buy low and sell high. In these same major market indexes over this same period of time, wouldn’t you agree that there have been opportunities to buy low and, likewise, opportunities to sell high? Then the question is why don’t I do it… or why doesn’t my advisor do it? Well, the biggest reason is that it is impossible to know the exact highs and lows in the market among others.

Despite this, it can still work. You just have to have a disciplined process in place to make it work. Our long standing recovery strategy at KFS is the same disciplined process we have used over the past 10 years and it is fairly simple. The only “moving” parts that tend to change and can become complex in the decision-making process are the individual investments we use. The reason? First, life happens and things change. A good investment yesterday may not be a good investment today. Second, your situation is unique. An investment that may be good for your next door neighbor may not be a good investment for you.

We use the income from non-market correlated investments like real estate to buy into a portfolio of market securities using a process known as “dollar cost averaging.”Assuming this portfolio of securities grows we capture the profits and move these dollars to meet the objectives of our client, whether it be income, growth, growth and income, etc.

Okay. Think of it this way: I like beans. Last Sunday I went to the grocery store and bought a can of beans for $1. Monday they were on sale 2 for $1, so I spent $1 and bought 2 cans. Wednesday they were not on sale—they were $2 per can, but I was just craving some more, so I bought a can. Thursday they were on sale 4 for $1and I bought 4 cans. By Friday they were on sale 5 for $1, so yep, I spent $1 and bought 5 cans. In other words:

Day                Price/ Can       Cans     $ $
Mon                 $1                    1          $1
Tues                $0.50               2          $1
Wed                 $2                    1          $2
Thu                  $0.25               4          $1
Fri                    $0.20               5          $1
Total                                        13        $6

Now it’s Monday of the next week and let’s assume beans are back up to $1 per can. It is possible that the price of beans could remain depressed for a period and the investment to be a loser.  If I sold those 13 cans of beans today at today’s price, how much money will I make? $13.  And how much did it cost me to buy those 13 cans of beans? $6.  So I just cleared a tidy profit of $7.

Many retirees count on regular, supplemental income from their IRAs and other accumulated assets. So it’s no surprise that many retirees were pulling money out of their investments at the bottom of the market in this current recession. For instance, if their portfolio was down 40%, it means he/she is pulling this money out at 60 cents on the dollar. Added to that, if the funds came from a qualified retirement account it could be taxed as well. So if this same retiree is in the 25% tax bracket, he/she would only receive 45 cents on each dollar. In other words, the retiree would not only be taking out principal, but more principal than usual just to suffice his/her current needs. And to add insult to injury, these dollars were no longer invested and in a position to take advantage of the upside we have experienced this year.

Our disciplined process is to keep 3 to 5 years of income needs (depending of the individual’s unique situation) accessible in order to avoid pulling money out of a down market.  No, not in cash or non-income producing investments — we still want to do our best to outrun inflation. But we do trade off potentially higher returns in order to utilize investment vehicles that have the objective of protecting the principal.

This should not be considered individual investment advice. You should review your risk tolerance and investment objectives before making any investment decisions. The strategies discussed involve risk including potential for principle loss. You should carefully review any offering material before purchasing a security. Dollar cost averaging is a strategy, and like all strategies it can fail. Dollar cost averaging does not assure a profit, may not protect against loss and involves continuous investments in securities regardless of fluctuating prices. You should consider your financial ability to continue to make purchases over an extended period of time.  

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