Selling and buying in the same 'climate'

Frankieplus · 6 April 2020

Hi all,

Sorry for my posts recently I keep coming up with questions but I'm almost at the end I've become very comfortable with investing now.. .

I know I should know this but I want to make sure... Is it normal practise and ok to sell and buy again in the same 'market' for the purpose of changing strategy. I'm sure people do this if their portfolio isn't performing.

I want to build a growth portfolio now while the market is down so that I can target growth and in about 2-3 years want to switch say 70% of it over to more of an income generating portfolio. The Growth portfolio may consist of ETFs and managed funds in todays market.

I can't see anything wrong with this I'm sure people do it all the time but I just wanted to make sure there aren't any hidden problems that I haven't considered.

One thing I considered is, why don't I just go into a dividend focused portfolio now rather than in 2 years, . But then if there's no big deal I would rather growth now because I don't need the dividends now.

I realise I can target both growth and dividends now, and I didn't want to over complicate my question but the question really is based on the practise of selling and buying in the same market climate later down the track..

The only possible downer would be capital Gains tax perhaps? Other than this any other issues I should be aware of?

-Frank

willoneau · 6 April 2020

It might be me but the question or questions seem a little confusing?

Frankieplus · 6 April 2020

willoneau said:
It might be me but the question or questions seem a little confusing?

Ok sorry if I confused.

1. Start a portfolio now while the market is hovering around 5200.. VAS, VGS, A few managed funds.

2. Wait for market to get to 7000 (assuming it does)

Money has grown now.

3. Sell down entire portfolio including profits of hopefully 15-25% gains by then and with all this start a new portfolio focusing on mostly income

Does this practise seem ok or does it look like something dumb to do?

-Frank

willoneau · 6 April 2020

Frankieplus said:
1. Start a portfolio now while the market is hovering around 5200.. VAS, VGS, A few managed funds.

what if market goes lower ?

Frankieplus said:
2. Wait for market to get to 7000 (assuming it does)

wishful thinking?

Frankieplus said:
3. Sell down entire portfolio including profits of hopefully 15-25% gains by then and with all this start a new portfolio focusing on mostly income

what if portfolio drops by 15-25%?

Frankieplus · 6 April 2020

Frankieplus said:
1.Start a portfolio now while the market is hovering around 5200.. VAS, VGS, A few managed funds.

willoneau said:
what if market goes lower ?

Thats fine, if it goes lower I'm ok.

Frankieplus said:
3. Sell down entire portfolio including profits of hopefully 15-25% gains by then and with all this start a new portfolio focusing on mostly income

willoneau said:
what if portfolio drops by 15-25%?

Thats ok if it drops by 15-25%. I will then sell at a 15-25% loss and buy the income portfolio with 15-25% less money on paper? I say on Paper because I am selling and buying in the same day.. Not long enough for there to be an actual financial loss right? I haven't locked in my losses by going to cash for an hour have I?

The fact that I am selling buying / buying selling in the same market conditions does it have any side effects other than capital gains?

So long as my money is in the market can I simply just go ahead and buy sell, change strategy, go from ETF to managed fund, sell that down and buy direct shares, do whatever I want every few years, so long as I don't go to cash for a length of time, are there any detrimental effects of this other than capital gains each time I sell?

Sorry my wording wasn't good.. My concern is, if I have a portfolio and it goes down 20% I haven't really lost 20% its just on paper. When I go to cash I have actually LOST 20%.. But if i go to cash for an hour and immediately get back into the market have I really lost 20%? Or do I pick up whee I left off with the new stocks.

-Frank

sptrawler · 6 April 2020

Frankieplus said:
3. Sell down entire portfolio including profits of hopefully 15-25% gains by then and with all this start a new portfolio focusing on mostly income

-Frank

And buy what? if VAS and VGS has gone up 15-25%, that would indicate the market has gone up the same, why wouldn't the quality income producing shares have gone up the same?
If they had, why wouldn't you just accumulate the income producing shares now and hold onto them?

willoneau · 6 April 2020

In today's climate you could lose 15-25% of your Capital or even more and take many years to get back to the starting Capital you have right now.

Frankieplus · 7 April 2020

sptrawler said:
And buy what? if VAS and VGS has gone up 15-25%, that would indicate the market has gone up the same, why wouldn't the quality income producing shares have gone up the same?
If they had, why wouldn't you just accumulate the income producing shares now and hold onto them?

Thats a good question and its the question I was asking myself as well in a way. I think I want to see how my portfolio performs.

I am starting to invested in a portfolio of 50% VAS/VGS and 50% Global Income/Australian Income Managed Portfolios and Managed Funds. I am so far about 30% invested. I started to dollar cost average into this in January with market over 7000. My plan was to hold for 5 years and then start to include the dividends as part of my income.

At the time (January 2020) Income producing shares wouldn't have produced enough income for me and possibly not enough growth moving forward to allow for the income I wanted, hence why i went for the above portfolio.

But now that the market has dropped significantly I'm second guessing myself and thinking should I change strategy now and possibly just go for what you said, income producing shares and hold on to those.

Or..

Continue on with my original plan and if I'm not happy in a few years and if I feel income generated not enough then sell down and buy the income producing portfolio later on.

So, I want to make sure that this selling and buying process and the fact that i would have to go to cash for a day to do so , wouldn't be a detrimental to my cause.

-Frank

Frankieplus · 7 April 2020

willoneau said:
In today's climate you could lose 15-25% of your Capital or even more and take many years to get back to the starting Capital you have right now.

Yep. I am dollar cost averaging in..

-Frank

Cam019 · 7 April 2020

Frankieplus said:
Thats ok if it drops by 15-25%. I will then sell at a 15-25% loss and buy the income portfolio with 15-25% less money on paper? I say on Paper because I am selling and buying in the same day.. Not long enough for there to be an actual financial loss right? I haven't locked in my losses by going to cash for an hour have I?

Okay. If your portfolio drops by 15-25% and you sell to transition into your income portfolio, you don't just have a 'paper loss'. You have an actual capital loss of 15-25%.

Frankieplus said:
My concern is, if I have a portfolio and it goes down 20% I haven't really lost 20% its just on paper. When I go to cash I have actually LOST 20%.. But if i go to cash for an hour and immediately get back into the market have I really lost 20%? Or do I pick up whee I left off with the new stocks.

Yes, you have actually lost 20%. If you go to 'cash for an hour' you will have had to sell some or all of the financial instrument to get to cash, solidifying your 20% capital loss.

Frankieplus · 7 April 2020

Cam019 said:
Okay. If your portfolio drops by 15-25% and you sell to transition into your income portfolio, you don't just have a 'paper loss'. You have an actual capital loss of 15-25%.

Yes, you have actually lost 20%. If you go to 'cash for an hour' you will have had to sell some or all of the financial instrument to get to cash, solidifying your 20% capital loss.

Right ok this makes sense..

Ok so I solidified my 20% loss but didn't I kind of cover it by buying back in quickly?

The only dollar figure I feel I would have lost would be capital gains and some brokerage fees to sell and buy again.

So over a longer term say a 5 year period wouldn't the loss be negligible?

Eg: I start investing, then 2 years sell and buy and then 2 to 3 years after that I look back, wasn't that loss just a glitch and not relevant anymore?

I'm assuming so..

-Frank

willoneau · 7 April 2020

Frankieplus said:
Ok so I solidified my 20% loss but didn't I kind of cover it by buying back in quickly?

you buy back with 20% less Capital.
also not really understanding how buying back quickly makes any difference?

Frankieplus · 7 April 2020

willoneau said:
you buy back with 20% less Capital.
also not really understanding how buying back quickly makes any difference?

This is what I'm trying to get my head around.

Does the same apply on the up? If it rises.. Consider percentage gain is different to percentage loss.

You buy in and stock worth $10k.. , rises to $12k and you sell and buy $12k of something else.

Isn't this just a continuation of your money going up?

-Frank

willoneau · 7 April 2020

Frankieplus said:
This is what I'm trying to get my head around.

Does the same apply on the up? If it rises.. Consider percentage gain is different to percentage loss.

You buy in and stock worth $10k.. , rises to $12k and you sell and buy $12k of something else.

Isn't this just a continuation of your money going up?

-Frank

yes you have made 20% profit on your Capital before brokerage.

willoneau · 7 April 2020

Frankie the sort of questions you are asking gives me the impression you need to spend some time educating yourself about the markets and not be in a rush to put your hard earned Capital at risk.

sptrawler · 7 April 2020

Frankieplus said:
This is what I'm trying to get my head around.

Does the same apply on the up? If it rises.. Consider percentage gain is different to percentage loss.

You buy in and stock worth $10k.. , rises to $12k and you sell and buy $12k of something else.

Isn't this just a continuation of your money going up?
-Frank

I call this tactic 'chasing winners', most new investors do it, they see a profit and take it.
Then they look for another 'buy', which gets progressively harder to find, meanwhile the quality shares that they bought originally kept going up.
The 'plan' usually ends up with the punter holding a handfull of crap shares.

If you want to go the track of 'flipping' shares to make profits, learn how to trade, there are plenty of great traders on here, who can help you.

If that isn't your bag, buy quality shares that you want to own for a long time, then add to them in times of weakness.
I have always stuck to shares that pay a dividend and while I was working used the dividend re investment plans, when available.

Sharkman · 7 April 2020

Frankieplus said:
My concern is, if I have a portfolio and it goes down 20% I haven't really lost 20% its just on paper.

do not fall into this way of thinking, it is a trap. if something goes down 20%, YOU HAVE LOST 20% and you will be wearing losses until that thing goes up 25% (plus inflation) from there, with no guarantees that it will do so. doesn't matter whether you choose to sell it or not. nobody is going to say "well the market price for XYZ is $80, but i know you originally paid $100 for it, so y'know what, because i'm a nice guy, i'll give you $100 for it whenever you want to sell it".

many people (my younger self included) have held on to stocks for way too long despite noticing its deteriorating fundamentals because of this fallacy that "it's not a loss if i don't sell". only to watch said fundamentals continue deteriorating all the way until the administrators are called in and the stock becomes worthless.

if it's an index then yes in all probability it'll return to its previous level at some point, though nobody knows exactly when that will happen. if it's a stock then the reason it fell 20% could be because of deteriorating fundamentals and outlook, from which it may never recover, and eventually go to zero. but it could also be due to unfounded panic and sentiment, in which case it could be a great opportunity to pick up $100 worth of intrinsic value for $80. your job as an investor (and it's often not an easy one) is to figure out which is which.

sptrawler · 7 April 2020

Sharkman said:
do not fall into this way of thinking, it is a trap. if something goes down 20%, YOU HAVE LOST 20% and you will be wearing losses until that thing goes up 25% (plus inflation) from there, with no guarantees that it will do so. doesn't matter whether you choose to sell it or not. nobody is going to say "well the market price for XYZ is $80, but i know you originally paid $100 for it, so y'know what, because i'm a nice guy, i'll give you $100 for it whenever you want to sell it".

many people (my younger self included) have held on to stocks for way too long despite noticing its deteriorating fundamentals because of this fallacy that "it's not a loss if i don't sell". only to watch said fundamentals continue deteriorating all the way until the administrators are called in and the stock becomes worthless.

if it's an index then yes in all probability it'll return to its previous level at some point, though nobody knows exactly when that will happen. if it's a stock then the reason it fell 20% could be because of deteriorating fundamentals and outlook, from which it may never recover, and eventually go to zero. but it could also be due to unfounded panic and sentiment, in which case it could be a great opportunity to pick up $100 worth of intrinsic value for $80. your job as an investor (and it's often not an easy one) is to figure out which is which.

Absolutely spot on post @Sharkman.
Take AMP as an example, they floated at $36, they are now $1.30?
Someone who has held them since the float, in all probability will never see the $36 figure again.
That isn't to say there isn't opportunity trading AMP, but as a long term hold, the trend doesn't support the tactic.
Just my opinion.

Cam019 · 7 April 2020

Frankieplus said:
Right ok this makes sense..

Ok so I solidified my 20% loss but didn't I kind of cover it by buying back in quickly?

No, you didn't. Not at all.

Frankieplus said:
The only dollar figure I feel I would have lost would be capital gains and some brokerage fees to sell and buy again.

No, what you lost was 20% of your original capital plus brokerage to buy and sell.

Frankieplus said:
So over a longer term say a 5 year period wouldn't the loss be negligible?

No, you still lost 20% of your starting capital and you have no idea what your investments are going to do over that 5 year period, none. You might hope, or think, or pray that they will go up. But in actual reality, you have no idea. No one does.

Frankieplus · 7 April 2020

Sharkman said:
do not fall into this way of thinking, it is a trap. if something goes down 20%, YOU HAVE LOST 20% and you will be wearing losses until that thing goes up 25% (plus inflation) from there, with no guarantees that it will do so.

Yes understood. But because my question is based on the maths involved not market sentiment, then for the argument can we assume all being equal, I have lost 20% on Portfolio #1 because I sold on the way up but I immediately bought into Portfolio #2, so doesn't my 20% loss from Portfolio #1 get picked up by Portfolio #2 as it continues up?

I know you may say, how do I know it's going to continue up but lets assume it does for the sake of the maths / percentage gain v loss.

And in reverse?, I don't want to complicate it I'll try explain..

Pretend the market is at 7000... lets say I invest 100k at then the market drops 20%, I now have $80k cash once I sell right? (Ignoring taxes for now)

So with this $80k I buy a new portfolio but because the market has dropped, this new portfolio that used to be 100k is now also $80k right?

When the market goes back to up 7000, I will be back at a new portfolio worth $100k

I know this may sound like a stupid , simple maths question for me to ask but I just want to make sure I'm not missing anything. Financial maths can be different to other maths.

-Frank

Selling and buying in the same 'climate'

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