One of the investing pitfalls I’m trying to avoid is buying when the market is high and selling when it is low. That’s a certain way to lose money during any economic environment. The best solution, other than investing what you can, when you can, regardless of the state of the market, is to move money into stocks when the market is low and move out when the market is high.
It’s nearly impossible to get this right, however.
You don’t know when the market is low or high. “Low” and “high” are relative terms. With the S&P 500 at 1,300, there’s no way to know whether this will be the high or low water mark for the next 52 weeks. You can only compare today’s number to the past. If the market is sitting at a high for the past two years, that could indicate it’s time to sell or it could indicate the market will go higher for another three.
It’s not all or nothing. The buy low, sell high strategy seems to rely on a fixed pool of assets moving back and forth between equities and another investment not reliant on the stock market, like cash. That’s not how most people invest. When people receive income every two weeks or every month, unless they have an automatic investment plan, they need to decide whether it’s a good time to put a portion of that income into stocks.
Those who do have automatic investment plans based on a fixed dollar amount, as long as they resist the temptation to change the plan based on the economy, buy more of the stock market when the price is lower. This is the best approximation to buying low and selling (or buying less) high, and is flexible enough to stand up to long-term performance. The only way to beat dollar-cost averaging is to buy your entire portfolio at the onset of your investment strategy and hold onto it for as long as possible, but that’s impossible for most people who can only invest as they earn money.
This runs against investor psychology. When the media scream that the market is at historic lows and the public is fleeing the stock market en masse, the numbers message is usually accompanied by reports predicted even lower numbers. Financial columnists and planners whether the rules of the game have changed or whether the stock market will ever recover. At this time, they’ll remind investors that past performance, like the 8% annual return for stocks over long periods of time, does not guarantee future results.
The normal reaction is to run away. If the boat is sinking, you’re not going to jump on. If you fight the urge to invest like everyone else, you might be able to buy when the stock market is low and sell during bubbles of market exuberance.
Mixed messages. Investing against popular trend isn’t a secret. Even when the market has tanked and the media is flooded with messages about the downfall of stock investing, the Internet makes it possible for minority opinions to have a strong voice, too. You’ll see more than enough messages in the media saying that it’s a great time to buy. If your approach is to invest in the opposite direction of the general public, you can’t necessarily judge whether most people are selling or most are buying.
Do you try to buy low and sell high? What do you look for to ensure that this philosophy works?
Published or updated February 25, 2011.