Buy Low, Sell High
Easier said than done, buying low and selling high is an attention-grabbing concept that we all want to put into action. Here’s a sure way for you to sell high and buy low that was offered to us by Chuck Jaffe back in the spring of 2016. His article is a perfect primer on portfolio rebalancing that requires “selling winners and investing the proceeds in laggards”, but it’s the Judith Ward quote within that best sums up everything we aim for:
“As an investor, you should have a target asset allocation that is going to help you reach your goals and that will be appropriate for you from a risk-tolerance perspective. Rebalancing makes sure that you get your portfolio back to that target allocation,” said Judith Ward, a senior financial planner at T. Rowe Price Investment Services. “It’s counter-intuitive – because it means you are moving out of things that are doing well into things that aren’t doing as well – but when you think about it, you are selling high and then buying low.”
The Starting Place: A Diversified Portfolio
It all starts with a diversified portfolio. In short, a diversified portfolio spreads out your investments among many different investment vehicles from stocks and bonds, to real estate, to speculative investments like crypto. You should decide on percentages that match your own risk tolerance. For example, the younger you are, the more time you have to recover from potential losses, which means you can afford to take more risk. On the other hand, for anyone at the other end of the spectrum approaching retirement, the equation gets turned on its head and the appropriate allocations fittingly inverted as the desire to minimize risk increases. The classic “balanced” portfolio lies in the middle, and assigns a more or less equal weighting to 5 principle categories as seen in this pie chart from Forbes.
Of course, crypto should only be a fraction of your total net worth - indeed just a fraction of the speculative subcategory within the “Alternatives” piece of the pie - just as you’re diversified on the macro level, each investment class itself needs to be diversified within: stocks into blue chips, mid-caps, and growth, for example. Your crypto portfolio, that 5% of your total net worth, for example, should be equally well diversified within.
The Key to Success: Automatic Rebalancing
Once you’ve reached the point of having created a clearly defined portfolio, you move on to automatic rebalancing. This is where we get into the meat of what this means in terms of buying low and selling high.
Let’s say you have a relatively risky crypto portfolio in the sense that your diversification is rather restricted since you’ve only invested in 10 different cryptos, and then let’s say that you’ve given each an equal 10% weighting and further decided that you’ll rebalance whenever any individual crypto gets between 5-10% or so away from its original 10% weighting (reaching a total of 15-20% or more of the total portfolio). Then you sit back and do nothing until you’ve got an investment that grows to 15-20% of the total portfolio, and then, once that happens, you simply sell enough to bring it back in line. You then use the proceeds to bring laggards back up.
That’s it! In its most basic form, it’s quite easy, there’s nothing to it, and you’ve greatly reduced your overall risk at the same time that you effortlessly buy low and sell high.
Positive Side Affects: The Elimination of Emotion and Complications
If you’re at all like me, your biggest challenge is that of controlling your emotions: keeping euphoria in check at the tops, and avoiding despair at the bottoms, so that you keep yourself from doing exactly the opposite of what you should be doing. A balanced portfolio is your best friend when it comes to managing emotions.
But, unfortunately, the challenges don’t end there. Who is really expert enough to be able to know when to buy and when to sell just by reading the charts? Or by listening to experts and analyzing fundamentals? Even the best of traders will tell you that they are wrong more often than they are right! They are the first to admit that they only make money by quickly selling losers and letting the few winners run!
The complications are numerous. Who among us is good enough to even know where to put those famous stop loss orders? And with a crypto stop loss that is often executed many a percent away from where you set it?
Who would want to mess with any that if you didn’t have to?
Automatic portfolio rebalancing eliminates all that, frees your life up for other things, and lets you sleep like a baby at night, and all the while you’re buying low and selling high!
A Simplified Crypto Example
Let’s say that with 20/20 hindsight you made the almost brilliant purchase of an equal $1,000.00 amount of ETH, DASH, XMR, LTC, XRP, ETC, XLM, STEEM, BTS and SYS on January 1 of 2017 – a 10% allocation of a $10,000.00 investment to each.
Today your portfolio would look like this in USD valued percentage terms:
ETH ~16.3%
DASH ~15.5%
LTC ~13.3%
XRP ~12.9%
XLM ~11.9%
BTS ~11.3%
SYS ~8.3%
XMR ~4.4%
ETC ~4.1%
STEEM ~2%
Do you see any major imbalances? Where would you go from here? Do you see any no-brainers? This hypothetical investment would now be worth $532,728. You’d have a lot of money to be skimmed off of ETH and DASH to put into STEEM (XMR and ETC too, if you wanted to continue with them), around $63,000 to “redistribute”, and all without ever looking at a chart – in spite of the fact that looking at the charts would probably make you much more comfortable with your “trade”!
And you’d just have bought low and sold high in the process!
Related resources for those who wish to go beyond this basic introduction.
https://www.investopedia.com/university/risk/risk4.asp
https://www.fidelity.com/viewpoints/guide-to-diversification
https://www.investopedia.com/terms/r/rebalancing.asp
https://www.investopedia.com/investing/rebalance-your-portfolio-stay-on-track/
https://www.reuters.com/article/us-column-stern-advice/how-to-force-yourself-to-buy-low-and-sell-high-idUSKBN0GD1MV20140813
Hello @cryptographic,
Your extraordinary good article reminds me this extraordinary good quote.
Due to the emotional factors, we all are not good traders. But we all are good holders if we do thing with patient. Therefore, portfolio diversification is an enormous good thing to made a good profit without risking everything at one basket. Extraordinary good blogging & willing to follow your guidelines. Thank you.
~@mywhale
Many thanks for the wisdom and kind words! Love the cartoon!
No doubt about it, the statistics show that 95% of would be traders eventually go broke, and there's a very good reason why.
Thanks again and looking forward to having you around.
Hello @mywhale,
the statistics show that 95% of would be traders eventually go brokeWell said, I also heard a lot of bad experiences & made myself to keep away from trading. But with your guidelines, holding is the securest & most profitable methodology.
~@mywhale
I also love animated novels so often I sit together and see my family together
It's wonderful and especially seeing her together your kids feel a sense of supreme magnificence
Is that statistic in regards to people that invest and decide to become a 'would-be trader' instead of holding? Or the general public? Been following you since your 10k to 1m thread on bitcointalk and every piece of advice I've read from you is gold. Buy low and sell high is something that seems somewhat impossible to do yet you explain how easy it is to do without even trying, it's like there's some secret logic out there that nobody can seem to grasp. This is the most simple concept but I never would have thought of it.
Really great write up @cryptographic :) A balanced as well as diversified Portfolio is definitely important and quite easy to be done by everyone. But just like you mention as well in the end it´s the emotions that might make you take exactly those actions that you shouldn´t...
Controlling your emotions on such a volatile market is especially tricky as you never know how high or low it´ll go, so that FOMO & FUD might mislead you into selling low and buying high instead.
I would therefore always recommend to keep a certain percentage of your Portolio invested in the long term and just use a portion of it for short term gambles. That way you minimize your risks while still having a chance on high profits :)
Controlling your emotions is probably 90% of the game, and a completely mechanical, automatically adjustion portfolio (which only exists in theory) totally eliminates all emotion while buying low and selling high. Nevertheless, everything within the portfolio, all the rules for rebalancing, etc., all the criteria and limits are subjective, and, of course, changeable. That means that you can even break the portfolio's rules you have set, so emotion is still a very important enemy to keep in check. Like anything, it looks great on paper, but then we've got to put it into practice, and the worst thing we can do is break our rules when those rules should be kept. As you say, we never know just how high or how low something can go, and that's why it's best to just sell or buy those small percentages that we need to keep each holding in balance, even with the longer term portions of your portfolio. And of course, only a small percentage of the total portfolio should ever be used in shorter term trading (some even think about that as a completely separate "account").
Great suggestions. The diversify and reinvest is sound for the passive investor.
To me, it all comes down to research. If people would research what they are into, they would fare better.
At present, my main token holdings are BTC, ETH, LTC, BTS, STEEM, and another coin that is being introduced shortly. The later three are projects I believe in and follow very closely.
Recently, I took some off the table in both BTC and ETH after nice run ups. I dropped my BTC holding about 1/3 and my ETH 25%. In terms of percentage of portfolio, BTC is no longer my largest holding, it dropped to 3rd and moving towards 4th. Ironically, the run up in other tokens helped to rebalance my portfolio (along with additional capital).
As much of a loudmouth blowhole that he is, one thing that I like which Cramer said, if you cant spend at least an hour a week on each stock you own, you shouldnt own them.
I believe this with coins..if you cant spend an hour a week studying what is going on with each of your holdings, do not own them. Things can change very rapidly.
No doubt about it. It happens all the time, if most of your picks are good picks! What's really nice though is when they rally at different times and you skim off the current winner to "average down" on the laggard that turns out to be the next pump that you skim off to reallocate into the next pump, rinse and repeat. It doesn't always happen so perfectly, but it happens often enough to make you a real believer.
Man, that Cramer wisdom really has me thinking. Seriously.
Just between you and I, @cryptographic, in the stock market, I am not big on diversification. To me, it breeds laziness. Besides, if the market is going to get hit, diversification doesnt help much since all get taken down. I prefer to study what I buy and keep on it until it gives me a reason to sell.
In crypto, things obviously are less certain. We are at such an early stage, few can predict who will make it and who will not. There are plenty of terrific blockchains that will fail due to lack of capital, or more likely, lack of blockchain talent to overcome the hurdles that will come. Expertise in this field is still rather limited due to its infancy. For that reason, diversifying is good. Having all of ones money in a particular token is a bad idea. No matter how good it looks, it can still collapse.
That said, I still feel very comfortable with the BTS and STEEM connection. To me, these are going to be my true winners in 2018. In fact, both are running of late so maybe the Church of Dan is starting to be recognized.
Thanks as always for your replies and interaction.
I agree with everything you say, well, almost. I diversify with stocks as well since you never know when one good one might take a hit for missed earnings or whatever. You're right though about all of them getting hit when the general market gets hit, but some more than others of course. That's why I'm way underweight right now - with stocks currently floating on air, I see a very negative risk/reward there. However, a sell-off will come sooner or later, and I imagine that will coincide with a need to take profits in crypto. When stocks are down 50-60%, I'll be a buyer again, and most likely my portfolio will be demanding it too!
Hopefully it coincides with another 200x gain in your crypto portfolio.
😂
Let's hope so!
This is really a big topic of discussion. It has been noticed lately that everyone speaks about it all and draws attention, but the majority have one result
Everyone is free to take his decision
And finally thank you for putting this interesting topic I benefited from your article I did not know my greetings
@taskmaster4450
@cryptographic
Yes it is a big topic of discussion and something that often gets left aside exactly when it should be front and center.
Yes bro
This is the thing I like most about you
And stirring up a stirring sparkling leader
@taskmaster very right what you are saying! "If you cant spend an hour a week studying what is going on with each of your holdings, do not own them. Things can change very rapidly."
ANd something to add with crypto is that a week in crypto is like one year in the real world as most people know now.
Regards, @gold84
The great thing about crypto....
You spend a week becoming an expert and the rest of your life trying to figure out what is going on.
I was so sure I understood exactly what was going on when I tried to day trade a few weeks ago. Three good trades and one very bad one later, and I was down nearly 30%. Then I sold most of my BTC before the futures came out because I was sure it would crash. I have no idea what I'm doing. Now I'm content just leave my fun money in there and I might look at it in a year or so.
And I recommend doing that with a balanced portfolio and keeping some dry powder for future purchases at bargain prices on the correction that's coming sooner or later.
@cryptographic so here you came with an extraordinary post. I have learned something new here. Redistributing itself in the way as shown in the crypto example is leveling all the portfolio to the initial percentages of 10% and by doing that you will be buying low and selling high.
Simply amazing.
Thanks for sharing this great knowledge.
Upvoted and resteemed.
Regards, @gold84
That's the basics from where you start. The 10% equal distribution is highly theoretical. You might decide to "overweight" your favorites and "underweight" others. For example, I've got some really speculative long shots in my portfolio that started out at 2.5%. A couple have gone down, and one almost reached a 10% of total portfolio position. For a 2.5% holding, that was way out of line and I should have sold something but I chose not to since I really like that particular crypto. Essentially I'm overweight a particular speculative investment. You might say I'm overweight my core holdings as well since my portfolio doesn't make it to 10. I'm doing this because I think I've made very good picks and I don't need to spread the risk. Of course, the risk I'm taking is higher by doing that, but it's still in line with my risk tolerance since my crypto cost basis is extremely low. Finally, on the total net worth level, I'm actually very overweight crypto! Again, that's because my cost basis is so low, but someday, if I keep to best practice portfolio management, I'm going to have to take something out of crypto and probably put into traditional stocks, which I am extremely underweight right now. So yeah, it's simple to begin with, but there are lots of factors to take into account and decisions to be made (both initial and ongoing). Glad you liked it.
@cryptographic I really appreciate your further explanation on this. When you actually start using it, it is a very objective and powerful tool/strategy to help your portfolio grow, by puting emotions on a side.
In my current situation I know the cryptos I want for the long term, but at the same time have others that I believe will give me profit in the short or mid term.
The only thing I don't know how to do, is put the correct percentage weight to each of the cryptos I own. I know this is really personal, and perhaps the solution will come to me in terms of research, as @taskmaster4450 mentions in this reply.
Thanks for the follow up.
Regards, @gold84
I've currently set my core holdings at 15% each, the more speculative, long shots at 3% each, and a USD cash equivalent at 25%. The hard part is deciding where to set your rebalancing levels. 20% or 25% for the core holdings? 10% for the long shots? Nah, 10% for the long shot is too conservative, that's why their long shots, so 25% is more appropriate since that's where they become less "long shot" and more "core". Had a long shot almost hit 20% a couple of months ago and I didn't rebalance because I really believe in it. It fell back to 8% and is now rising again. That's okay though; we can't catch them all. Perhaps we need to explore this topic more.
Wow, this is what I was doing intuitively when I first started trading. My profits from BTC went directly to other coins everytime I made profits. I'll admit I wasn't doing the rebalancing of 10% which is the next level but as I like anything that removes emotion and sitting in front of a screen I will apply this to my plan of attack.
Ive learned so much in two months my head is spinning, but with this info and the technical analysis I am learning from @Haejin I will continue building my portfolio to the moon.
Thanks for the post!
The 10% figure is just an easily illustrated figure. It all depends on your risk tolerance to begin with, then with your expectations for each issue, etc. I've got current rebalancing thresholds as high as 45-50% right now for core holdings, which just basically means that I want to see the individual holdings run a lot before I take profits, and that means I run the risk of missing a short term selling opportunity where something goes up to, say, "only" 40%. That's because I'm extremely bullish long term on those holdings, but I'm risking a lot of money when I do that. Of course, you're always watching current events, pricing, fundamentals, etc., and when something gets up into nose bleed territory, and things are looking shaky short to intermediate term, you might make a decision to "modify" your thresholds somewhat and scale out a little bit at 40%. I recently did a little of that with ADA, on the previous spike higher.
It is rather intuitive.
Always take some profits when you can.
With tokens, even if you are bullish on one of the big coins, there are other ones which are going to move bigger. That is the key. Not being tied to one token but realizing that things change and moving into others as they develop more.
@cryptographic,
What Judith Ward said is really important! Specially this is not only for traders, people who hodl crypto should aware about what he said! No doubt about your excellency knowledge in trading and fundamental analysis!
Your Crypto Example is really incredible! Yeah, your points are absolutely correct! If we invest with diversification on different currencies only $10,000 today we are members of half millionaires club (atleast)!
Thanks for sharing this wonderful and very useful article with us! After reading your posts, so far I could learn a lot!
You market supply based trading strategy worked on me perfectly and in last couple of days I could almost earn 50% ROI from my initial investment dude to that strategy!
Thank you very much for sharing your unique knowledge with us! I am really appreciate your effort too!
Cheers~
A diversified portfolio most certainly isn't the road to quick riches, but it is a sure path to long term success with minimized risk. It works in all areas and on all time frames from the most active trading books to the longest term hold-till-you-retire portfolios!
@cryptographic,
You are 100% correct bro, it can reduce the risk level! Specially in this crypto world we should think about the risk level! Excellent thought and guidance! I already started this method and so far made a great success!
Cheers~
Hi @cryptographic, After reading this post, I invested in sys and it is proving to be right decision.
Many thanks.
Steem On!
One of the best undervalued, great prospects for the future in my opinion.
And it hasn't done bad at all these last couple of days either!
One of the most important thing to check is the emotion ,Man it becomes more than difficult in times and no wonder the experts has the heart of a dragon i should say !
Yes from time to time it becomes hard to take the right decision to buy and sell but some facts can be regulated and at the end you will get to it that is my motto i guess if i am right .Mistakes will be made but learning from them and avoiding them in future that is what matters the most !
Thanks buddy for your suggestion will keep them in mind ;)
Learning from your mistakes is critical, just like learning from your success is too!
Those top traders don't necessarily have to have a heart of a dragon - they do what they do by balancing risk in a very similar manner, which they call hedging, but essentially it's portfolio management, just on a much shorter and quicker time frame. And the goal is the same: get emotion out of the way! How right you are!
Thanks buddy for the support and clearing it :)
Every job has their their own do's and don't ,we just have to understand that :)
Agreed with your comment btw!
That's pretty cool to know thanks for the tips by the way :)
You're most welcomed, and thank you for dropping by.
@cryptographic - Sir I feel I just read a professional market analysis report just now... Your suggested investment portfolio is outstanding Sir... In 2018 onward I'll make a investment plan like you said & follow it till the end of the year Sir... Thank you very much for sharing your genius knowledge of investment & crypto portfolio & a well know reference for the people who wish to be a part of this journey... A brilliant article & excellent advice you provided to us Sir...
+W+
Wait for a good correction, and then jump in, but remember, with only the amount you can affort to lose. Crypto is still very speculative.