4.4 Timing is Everything

timingChapter Overview
Nobody can reliably and consistently time the market.

Given that we can’t predict which assets will do well in the future, what can we do to minimise the potential for losses?

Dollar cost averaging
Unsurprisingly, we call this pound cost averaging and it’s simply the process of making regular small investments rather than one big lump-sum investment and guessing the right time.  On average, drip-feed investing works better.

Portfolio rebalancing
Morningstar has a good article on what exactly this entails.  The idea is that once you decide what your ideal asset mix should be, you check every now and then to see if it is still in line with that objective.

There are two reasons for this: First, you might be entertaining greater risk or lower returns than you’re aiming for, and second, you might have an opportunity to offset some capital losses against your capital gains.

While you can keep a track of your portfolio for free on Morningstar, their X-ray tool is a paid add-on which analyses your asset allocation.  I haven’t played with it because I’ve pretty much decided to buy an all-in-one diversified index fund which is automatically rebalanced.  More on this later ..

Tax Loss Harvesting
This is the practice of selling equities which have made a loss to reduce the capital gains made by selling equities which have increased in value.  This practice is bundled with rebalancing because that’s the time when you’re most likely to be buying and selling as part of that rebalancing act.

However, as this great Monevator article points out, everyone in the UK has an £11,000 capital gains tax allowance each year.  Also, capital gains realised within a tax free wrapper (pension or ISA) do not count at all.

As an individual, you currently have a £40K pa maximum pension contribution to use up and a £20K ISA pa max before even considering investing outside those tax-efficient wrappers – and therefore your exposure to capital gains or losses.  If you get to that point, go and read the Monevator article!