While many investors are familiar with the overused cliché buy low – sell high, very few can practice it consistently and often buy high and sell low. Why is this? When the future looks bright, company share prices typically trade at higher valuations, and investors, believing the status quo will continue into perpetuity, will throw caution to the wind. Their risk perception diminishes, and they increase commitments to equities at the very time they should exercise restraint. Conversely, when markets sell-off in response to slower economic growth and company share prices are trading at lower valuations, some investors will do the exact opposite, not realizing opportunity is often greatest when the future looks bleakest.
Economies and financial markets are cyclical, moving up and down over time, but always in an upward long-term trajectory. Inevitably, some unexpected event such as a pandemic, war, rising interest rates, or inflation comes along and upsets the apple cart, sending stock prices down temporarily. Individual investors, left to their emotions and intuition will often reduce or even halt contributions to their monthly investment program simply because stock prices have fallen. Some will commit the bigger mistake of selling at the point of greatest opportunity when instead they should be buying. This counter-intuitive, emotionally driven practice of buying high and selling low guarantees they will never achieve meaningful progress, and many will swear off investing in common stocks altogether. What’s an investor to do?
The answer is simple - buy low, buy high, and buy in the middle, but never sell in response to market conditions, good or bad. The only reasons to sell your equity holdings, in general, are as a part of a pre-determined rebalancing strategy designed to keep your risk in check or to fund your income needs in retirement or other goals such as gifts to favorite causes. This requires a clear understanding of the purpose of owning shares of publicly-traded companies. Common stocks have been a proven way to grow your real purchasing power (net of taxes and inflation) over time, period. To obtain that premium return you must own them, and it helps to consider such ownership permanent, long-term investments. Trying to buy low and sell high is a form of speculating, not investing, and subjects you to the risk of being out of stocks and forgoing their long-term benefits. The next time you are tempted to act outside the parameters of your pre-defined saving and investment strategy, it may be best to re-assess your goals, resources, and progress as contained and revealed in your intelligently crafted financial plan and then first consider doing nothing.
Stay Focused.
