Getting tricky with shares can also be a trap

I’M often asked about the right time to buy or sell shares. On the buying side, the answer is simple: when you have the money. On the selling side, the answer is a little more complex.

When it comes to buying shares it’s possible to make tonnes of money by getting your timing right. But if you plan to wait for the market or a particular share to bottom out (the optimum time to buy) you could be waiting forever. There is simply no way of knowing when a share’s value will reach a low point before it starts to head north again.

So if you’re thinking of buying shares, my advice is to skip attempts at market timing and focus on deciding which shares are right for your portfolio. Then buy when you have the funds available.

When it comes to the right time to sell, the answer is when you need the money. If you don’t need the cash, don’t sell.

Turning over your shares frequently will only stack up brokerage fees. Plus, you may miss out on dividends and potentially be out of the market during upswings.

There are other good reasons to hang on to your shares. On shares you’ve held for longer than 12 months, the tax man gives you a 50 per cent discount on any capital gains. But on shares held for less than 12 months, the full value of a capital gain is included in your taxable income, which reduces after-tax profits.

Nonetheless, if a share is consistently underperforming (continuing to fall in value or not recovering from a dip over a sustained period of months or years) you really need to think about offloading it.

There are some important things to consider before you do this though. Some shares perform poorly in terms of capital growth but shareholders hold on to them because they are a reliable source of fully franked dividends. Telstra shares are an obvious example of this.

When selling shares to raise cash, a trap many people fall into is to sell their best performing shares rather than their underperformers. It’s often based on the view that the outperformers must be due for a fall while the underperformers are due for a lift.

Personally, I hang on to my long-term outperformers and ditch the long-term duds. Persistently holding on to poorly performing shares thinking it must be time for them to come good, reminds a bit of the old golf saying, “When you think your game can’t get any worse, it does.”

It’s the same with some shares: when you think they can’t go any lower, they do. If you’ve got any dogs in your portfolio, consider getting rid of them before they start biting. Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.