The Antidote to “Buy High, Sell Low”

The Antidote to

The stock market has been on a tear recently. The month of January ended with the Dow Jones Industrial Average up six percent, the S&P 500 index north five percent, and the NASDAQ composite up “merely” four percent. And the trend has continued in February.

That caps a skein of months and years, ever since early 2009, in fact, in which the market has climbed ever higher, propelling the Dow above 14, 000 and the S&P 500 to within a stone’s throw of its highest close in history.

Predictably, it seems that many individual investors who were spooked after the stock market free fall of 2007-08 are timidly starting to dip their toes back in the water. They’re fretting that if they don’t, they will be left at the pier as a rising tide lifts all boats but theirs.

Somehow, these people never learn, in spite of many well-intentioned folks’ efforts to school them. All they have to do is tune in any one of the many investment-oriented radio shows airing each weekend, read one of the scads of columns on personal investing published regularly in newspapers or magazines, or visit one of the countless good personal finance websites, to know plowing cash into the market after a big run-up isn’t the shrewdest fiscal strategy.

The wrong way

But people being people, they will go on doing exactly the opposite of what they should. In short, they will go on buying high and selling low. A look at the last 13 or 14 years bears out that claim. What were many doing as the late 1990s dot com craze caught us in its frenzy?

They were trying to time the market by buying big time into tech stocks. They didn’t want to miss the gains as the “new paradigm” rewrote all investing rules. And after dot com turned dot bomb, and the market collapsed starting in year 2000? Why, they made for the exits en masse.

After reaching its nadir in October 2002, the stock market began climbing again, but many of those who’d panicked and sold remained on the sidelines, waiting for better times. Finally, after much of the gain had been realized, they became convinced those better times truly were here, and began buying in around the middle of last decade.

Then of course, the mortgage meltdown and credit crisis ushered in the Great Recession, stock prices imploded and they bailed out again. Many then swore off ever trusting the stock market again, having for the umpteenth time sold low and booked losses after buying in at comparatively high levels.

Media complicity

The media are to blame for some of this insanity, I’m positive. They not only report the stock news, but ask talking heads to pontificate on what it all means. Those jabber-wonks are likely to be fairly evenly divided as to whether the market will rise or fall over the coming days, weeks, months, and years. That could lead the more perceptive among us to ask if the lads and lasses who have spent their lives at it can’t agree on what will happen next, what’s the average person to think? And what’s more, what’s the sense of trying to time your entry into the market?

And don’t get me started on media sensationalism. How often have you heard a business report lead with something like, “The market skyrocketed Tuesday on hopeful signs from …”? Likely just as often as you’ve heard them start with something like, “Stocks plunged 200 points on dismal earnings reports from …”

Got the drift? Words like “soared” or “plummeted” are sure to suck a good many folks in. That hikes ratings, sells newspapers, and spurs millions of website visits. There is, after all, an emotional pull to those terms, the kind of emotional tug that can stimulate those dichotomous investing tendencies, the inclination to buy due to greed and sell due to fright. The only problem is that emotion is precisely what investors must avoid if they’re to be successful.

Dollar cost average

By the time you read this, the market may have just kept ascending. Or it may have cliff dived. But the best advice, the advice I’ve been hearing, reading and absorbing for every one of my 26 years as a stock market investor, will remain the same.

You have two choices. You can choose the certainty of knowing your savings will be eroded by cost-of-living increases over the years. Or you can choose the less-certain fate that you investments will decline in the stock market. But if you have time to wait, and the patience to pay a little attention to the peaks and valleys of the market, it’s a more likely possibility you’ll see long-term gains while in equities.

You’ll stick it out through the ups and downs, and when the market makes new highs (a couple of indices have scored five-year highs recently), take the profits you so richly deserve.

You can avoid buying high and selling low by dollar cost averaging into the market, investing the same comparatively small amounts at specified monthly or quarterly points along your investing timeline. That will force you to buy fewer shares when the market is higher, and more shares when it is lower, exactly what you should be doing. That also provides a controlled, well-conceived plan to move from all-cash to having some money in an equity portfolio.

In other words, you invest slowly, move from “safe” to “higher risk/return” slowly and build wealth slowly. The only thing to do fast, in fact, is to stop trying to time your entry into the market.

Please do that as quickly as humanly possible.

9 Responses to “The Antidote to “Buy High, Sell Low””

  1. Anonymous

    It is truly sad how many people I know that got scared by the market, totally bailed out in 2008/2009, and are only now getting back in just as the market approaches new highs. For people who cannot control their emotions at all with respect to their finances, they might as well just buy I-bonds and forget about stocks.

  2. Anonymous

    A big thank you for all the advice from this beginning investor. I’ve heard most of it before, but like they say, ‘… the third time somebody calls you a horse, maybe it’s time to go buy a saddle.”

  3. Anonymous

    Solid, time tested advice. Reference the comments about sell strategies: I guess I can understand the concern because the focus of dollar cost averaging is to buy and hold for the long run, not selling. I guess the assumption is that if you hold on to the assets, in the long-term, you only sell what you need. The strategy then is to figure out whether to sell in taxable or tax-deferred accounts, and which lots to sell for tax purposes.

  4. Anonymous

    KT – NICE!!!! Love the strategy and the analogy:) We follow this a bit with a fair amount of our retirement money in a T. Rowe Price life cycle fund (roughly comparable to Vanguard, but with a bit more risk). Our other retirement money is in a 401(k) and a 403(b)–I dabble with picking funds here to some extent (largely looking for low cost, well rated funds), but a good portion is in life cycle funds.

  5. Anonymous

    I tell my friends who are investing neophytes: try a low-cost (preferably Vanguard) life cycle fund, put as much money as you can afford in through payroll deduction and tax-sheltered accounts, and then just ignore the market news and go about your business.

    I use this analogy: life cycle funds from reputable fund families are like public transit. Just sit back and let someone else whom you trust do the driving. Fancy trading strategies are like Ferraris with dual clutch transmissions. If you know what you are doing, you can get there faster than the train. If you don’t, you’ll crash and lose a lot of money.

  6. Anonymous

    Although dollar cost averaging is a prudent strategy, once a certain amount of wealth is reached, it is also prudent to then maintain some type of asset allocation strategy. For example, one may determine that a proper allocation should be 60% stocks, 35% bonds, 5% cash. A re-balancing every 6 months or every year helps someone take the emotion out of investing and forces a buy low sell high strategy. Of course, now that bonds are at all time highs in price and all time low in yield, it is also prudent to be on the low end of the duration spectrum in one’s bond portfolio. Nothing wrong with dollar cost averaging, but it can be too simplistic at times.

  7. Anonymous

    The real antidote is rebalancing your portfolio. If done systematically, you will regularly sell positions that are up and buy positions that are down. It is quite a simple strategyt, but difficult to achieve in practice. How many people do you know who sold bonds and bought equities in 2008 and 2009? Not many. Those that did are in an enviable position now. In fact, these folks are already applying the flipside of this strategy by selling equities and buying bonds.

  8. Anonymous

    Kurt, I’m admittadly an investing neophyte, but I’m descent at math. If, like your example, you buy $500 of stock per month you will be buying more shares low (say 50 shares at $10) and fewer shares high (say 25 shares at $20). So really it changes the strategy to buy more low and buy fewer high. I guess there really is no sell strategy in dollar cost averaging.

  9. Anonymous

    Thanks Jeffrey. Though dollar cost averaging will prevent buying high and selling low, as you say, won’t it also prevent buying low and selling high? Would you agree that dollar cost averaging is merely a marketing tool invented by investment advisers to persuade people too fearful to dump, for example, $12,000 into the market all at once to instead invest $500 per month for 24 months, thereby growing incrementally the pool of investment cash from which ‘money managers’ derive fees?

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