For mining and resources professionals and executives whose personal wealth may be reliant on the performance of shares, the recent (and considerable) falls in some of the big miners’ share prices is very likely causing discomfort.
Certainly those who aim to time the market in the hope of selling their shares at a price peak will very likely be feeling the pressure more acutely than those who take a Dollar Cost Averaging (DCA) approach to selling shares. In this article, we explore how a DCA strategy can reduce risk and importantly, realise share value at the same time.
But first, what is Dollar Cost Averaging (DCA)?
In simple terms, it is an investment strategy based on making regular incremental investments or regular incremental sales of shares or units, over a period of time as opposed to a one-off lump sum investment or lump sum share sale. I call it ‘discipline’. A strategy that involves making small changes that can produce large long-term results.
The fundamental premise of DCA is to reduce the overall impact of volatility on the average price of a share. Most people are aware of the DCA purchasing approach, but don’t realise the benefits of applying it when selling.
For example, say you wanted to realise an amount of cash from a $500,000 share or unit holding which, for every 5% rise in share or unit price, earned $25k. Rather than sell the lot in one transaction, you decided to sell in increments of $25k, and there was a further 5% increase in value, then you would have realised $25k in cash, while only having sold down the 5% increase.
The alternative might be to wait and attempt to sell the entire holding at the same time on the upside, which could result in missing the peak price which could result in significantly less return on the entire portfolio.
Consider this in context of recent events when a few of the big miners share prices fell. One from $53 to $40 in just five weeks. Those who wanted, or needed to sell, but decided to hold on in the hope the price would go higher, would be feeling very disappointed as no one expected the price to have dropped so quickly or as sharply.
A DCA selling strategy is usually appropriate for those with large holdings in certain shares or funds who are looking to sell down their holding to either reduce their risk exposure or realise cash.
Again, for those who attempt to time the market, a common problem is keeping assets for too long, as they wait for, then miss the ‘nirvana’ price at which they hope to sell. There’s every chance the investor will then decide to hang on for even longer as they chase what they hope to be an even better price.
This is often the case for foreign currency exchange as well. When foreign currency prices begin to increase, many people hold out too long for a higher price, only to end up missing the peak. The alternative is to consider realising small incremental amounts at each exchange price gain or change.
Historically I’ve found DCA strategies return better outcomes generally. Regular incremental sales produce results from the ups of the market, which over time have resulted in realised value.
DCA is generally more psychologically acceptable for most people. This is because selling the lot in one go is difficult to commit to, as most people get to the price and then believe there is more upside and don’t make the call to sell because it’s a big decision.
In my experience, clients who achieve successful outcomes make small incremental decisions, and the last two months have illustrated the effect sharply.
Despite what many people think, share prices can be unpredictable. Sometimes uncontrollable external factors can produce substantial changes in short periods of time. Get it wrong, and the costs can be significant.
To be clear, I’m not suggesting a full shareholding sold at $53 versus regular incremental sales commencing at $41 and finishing at $54, would produce a better result mathematically. What I’m suggesting is that most people simply don’t make the decision to sell at $53, and therefore don’t benefit from the price gain at all.
While rethinking your buying and selling strategy is important, perhaps the more pressing first step is to give consideration to the diversity of assets in your portfolio and how much you hold in any one of those assets.
In our experience, mining and resources personnel, especially those with executive share schemes, often find themselves in a top-heavy position where their personal wealth is almost solely reliant on the performance of their company’s share price. If you find this to be your situation, I recommend you take action to manage this sooner rather than later.
Secondly, give careful thought to your selling strategy which should include developing a clear understanding of the outcomes you wish to achieve. Importantly, ask yourself if you have the time (and commitment) to execute the strategy and if you have the discipline and time to achieve the outcomes you expect.
If your answer to the latter is “no”, then may I extend an invitation for you to make contact and talk through your circumstances so appropriate strategies can be implemented for mitigating your risk and making the most of your income and personal wealth.
To find our more, please contact Brett Cribb or James Marshall on +61 (0) 7 3007 2000 or email firstname.lastname@example.org
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