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Why Buying Low and Selling High is Impossible

This article was written by in Investing. 11 comments.


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. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 11 comments… read them below or add one }

avatar kaidez

My philosophy is “slow and steady wins the race.” Systematic contributions and re-balances to retirement accounts…no trying to beat the market…ignoring market swings. I did buy heavily during the 2007-8 market dip and put about 21% away for retirement instead of the standard 15%, which made me a few extra bucks during the rebound. But past that, slow and steady does, indeed, win the race.

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avatar cubiclegeoff ♦896 (Dime)

I agree, it’s a good idea, but not very practical. If you have a lump sum and you’re at the bottom of the market, sure it can be done, but the “high” is all relative.

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avatar Ceecee ♦53 (Newbie)

In the current market climate, I’ve found this nearly impossible to do. Maybe it’s just me. I’ve gone to dividend investing.

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avatar SteveDH

Just before I retired I rolled over my 401(k) investments to my IRA, because of very restrictive withdrawal policies. Having done this in mid-2007 by all accounts my reinvestments were when the market was pretty high but dropping. 2008 was, of course, a disaster and it “appeared” I was losing a ton of money with each passing day. Near panic I took the time to look back at 22 years of dollar cost averaging (contributions made via payroll contributions) and although most of my gains were being eaten away the overall growth over those years was still positive relative to the amount contributed. The rollover had masked the realized gains since there was no tax consequences associated with the movement. Since I changed my allocations in 2007 in order to preserve capital (retirement scenario) the recovery seemed slow but it has recovered. Any long-term investment stategy has to look at contributions versus value from start to finish and not all the unrealized gains and losses along the way.

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avatar tbork84 ♦1,867 (Half-Dollar)

You bring up an very important point. Unrealized gains and losses is the number that most people focus on, but the most important number repeated time and time again for a successful retirement and investment plan is how much you have invested. I am on the opposite end of the retirement time-line, and I am maximizing contributions to a mix of index funds that matches my risk tolerance while I am young to take full advantage of the time I have ahead of me.

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avatar krantcents

I dollar cost average into the market through monthly payroll deductions. Since I invest in mutual funds, the professional manager is concerned with buying and selling. I periodically change my asset allocation which may mean exchanging funds.

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avatar rewards ♦31 (Newbie)

Since I hold onto my stocks for a long time, I focus mainly on companies that I think will outperform the SP500.

Also, since I don’t spend more than a few hours a year researching these companies, I limit that strategy to my mad money (~10% of my portfolio, the other 90% is in vanguard index funds). :)

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avatar Financial Uproar

Looking at the overall market’s price/earnings ratio is generally a pretty good indicator whether the market is overvalued or undervalued. It’s not perfect, but it gets close most of the time.

Buying companies or sectors that are out of favor does work. There are all sorts of value investors who manage to beat the market with this strategy. It takes discipline, patience, and a willingness to go against the crowd.

Buying at the market’s bottom and selling at the top is impossible. Buying relatively close to the bottom and selling higher isn’t easy, but it’s hardly impossible.

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avatar Harm

I was able to keep from selling all my stocks in March of ’09, but it was hard.
The prevailing opinion at the time was that stocks were headed lower. I think
Jim Cramer was mentioning a figure of 4000 for the DJIA….
And now I feel a certain pull towards putting ALL my cash in the market,
which probably isn’t smart, either. But whether smart or dumb, only
time will tell…..

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avatar javi ♦80 (Newbie)

I do dollar cost averaging. I have good faith that the market will be higher when I retire. Since I am young, I did put some extra money during the economic downturn. I knew this was a great time to buy stocks while on sale.

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avatar skylog ♦368 (Nickel)

to “get this right” is nearly impossible. i make my systematic purchases and rebalance. that said, i do, from time to time, make additional contributions to my accounts. in these instances, i do try to make the transaction on a “down” day. i realize that this makes little difference, but every little bit helps i suppose.

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