The global markets are in turmoil. Growth is slow, emerging markets face a currency crisis, stock markets are trading at jittery levels. Is this this the time to buy or sell? Mr Miyagi, the wise old man in the movie, “The Karate Kid”, started Daniel out on his training by making him spend hours on a windshield waxing on and waxing off. This turned out to be a harsh but worthwhile lesson in patience. Daniel eventually got the idea not to rush things. He could also see things more clearly from then onwards.
If you really want to invest a lump sum into the risky share market you should exercise extreme patience by spreading into your investment over a period of time. The strategy is known as “rand cost averaging”.
Avoid risking everything
Many investments are unitised (Unit Trust). The price per unit is determined by the combined market value of the assets in the unit. Shares, bonds, property and cash are affected daily by their various trades so depending on how your unit trust is invested the price moves. In uncertain times when you do not know which direction your investment is heading you could reduce the risk of buying at the top by averaging your capital into the investment over time. If there is a sharp drop in the value of the asset then the next investment will compensate as you will be buying up the discount.
Averaging out also compensates
The current turmoil in the global markets present a high risk of losing capital in the short term. To reduce the risk you should spread your capital into your investment. Similarly, if you are already invested and of the view that markets are running too high then you should consider averaging out by selling off over a period of time.
Timing is perfect at end and beginning of the the tax year
There are capital gains issues on the disposal of the investment. However, if you get it right you could sell off until February 2016 which is the tax year end. You then use your capital gains inclusion rate of R30 000. If you then sell off more after February you use the next year's capital gains exemption.
Averaging in and out of your investments will reduce the risks of sharp price movements. The longer the time taken to average, the less the risk tends to be.
Listen to the conversation between Sam Cowen and Paul below:
Read more from Paul Roelofse at www.investforlife.co.za