Broker Check

Buy Low, Sell High

January 16, 2020

We’ve heard it before. The age-old adage for investment success is to Buy Low and Sell High. Warren Buffet says it this way, “Be fearful when others are greedy and greedy when others are fearful.” On an intellectual level we understand that, but when it comes right down to it, it is hard to sell something when it’s up. Think about Apple stock, trading at all-time highs. If you own it, chances are, you don’t want to sell it. Because certainly, it will keep going up in value and you don’t want to miss those gains. It is a fact of life. It is hard to sell when the market is in your favor.

On the other hand, it is not hard to BUY when the market is in your favor. There is excitement, there is buzz, and sometimes there is frenzy. Buy this stock now because “look!” how much it has grown. Most likely, others are feeling the same enthusiasm and suddenly there is an influx of buyers of a single stock that has reached an all-time high. Then the inevitable happens. The value of that stock starts falling. Investors become concerned, then nervous, then alarmed, and then frightened. And, you guessed it, they panic and sell that stock as it reaches the bottom. Remember, they just bought this stock at an all-time high. And what do they have left? An investment LOSS.

Despite the loss, investors feel relieved that they no longer own this stock.

Then, this stock starts to recover. Investors become optimistic again, then excited, then elated and realize they need to own it. They buy it again, at an all-time high, along with everyone else caught up in the excitement of the impressive gains. And as markets go, the value of that stock starts falling. Investors become concerned. And the cycle starts over.

Often, we let our emotions drive our financial decisions. Investor emotions and behavior can de-rail financial success. Emotions tell us to buy when we are happy and elated and sell when we are nervous and doubtful. That equates to buying high and selling low. This always results in a loss.

The underlying premise of the stock market is that corporations are in business to make money. If you believe this, you should not let emotion steer your financial decisions. Corporations need money to make money. One way they raise money is by selling shares of their stock. The corporations receive money from those who purchase their stock and in exchange, they relinquish (or sell) a portion of ownership in their company, in the form of shares of stock, to the buyers. If share prices drop, the primary goal of the corporation is to do all they can to get share prices to increase. When we understand this, we can let the stock market do its thing … go up and go down. Historically, the stock market has gone up. Now, it’s not a straight line up. There will be some bumps along the way, but, over time, the angle has been up.

The question becomes: when do I buy? The simple answer: when you have the money to do so. If you can leave your money invested and do not pull it out when the market dips, anytime you invest, over time, will be a good time to invest. A better time to invest is when the market is down (it’s counter intuitive, I know). But think of it as buying the market on sale. And then what? Wait for it to rebound. Because if history repeats itself, a down market has always been followed by an up market.

Staying in the market is just a piece of the puzzle, but an important one. Once you commit to staying in the market, you are liberated to construct a truly diversified portfolio with exposure to stocks and bonds. You will gain confidence and peace of mind that even though markets fluctuate, you are positioned to capture those market changes. A diversified portfolio of stocks and bonds will position you to manage the market downturns most effectively. However you diversify, staying invested is critical for success.

Securities and Advisory Services offered through The Strategic Financial Alliance, Inc. (SFA) – Member FINRA, SIPC. Advisory Services also offered through Strategic Blueprint.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. The SFA does not provide tax or legal advice.

Published January 16, 2020