One of the most basic of stock buying strategies is to buy low and sell high. It makes absolute mathematical sense, but the difficulty is the execution. Psychology works against us: when markets are high there’s a euphoria that makes it very easy to join in with the herd and buy high. Conversely, when markets are low, it can seem like the world is ending and it makes it easy to sell low. Both temptations will undermine your long term investment returns.
Years ago when the dot-com bubble burst I was tangled up with all the standard greed-driven tech stocks (JDS Uniphase et al.). About 2 months after the burst, I was talking to my broker in New York (I’d never pay for a broker again!). He told me that everyone says buy low, sell high, but no one does it. This is the time to buy low he assured me and tried to get me to put more money into the market.
I agreed with his philosophy, and told him so, but at the time I wasn’t working and was gearing up to go back to school so I just didn’t have any extra cash. It was lucky for me that I didn’t, as things kept going down further and further. Part of the scary part of bear markets is that no one knows where the bottom is.
Some people decide to sell, thinking they’re being wise to move into a cash position. They stay in cash and miss the rally, and end up having to pay top dollar to buy back stocks later on.
Its scary times right now, with the TSX dropping 840 points yesterday. If you get out now though, you’re buying high and selling low, which is probably not a great idea. Some people will say they need their money and they can’t risk any more loses. I’m sympathetic to this view, but if this is the case, they never should have had so much invested in equities to begin with.
If its not that you need the money, but just that you can’t stand the thought of losing any more, it might be worth considering leaving your stock alone, stop reading about the market, and let it play itself out. They say a rise in stock price isn’t a valid reason to buy, and a drop in stock price isn’t a reason to sell, so make sure if you’re thinking about selling, you have reasons beyond the recent volatility.
Personal finance bloggers have been saying that evaluating your reaction to the current market tells you how risk averse you are. If you’re panicking right now, in the future it’s probably best to keep a large fixed-income portion in your portfolio and stay very diversified. If you’re able to ride this out without getting too excited, you’re probably a more risk-tolerant investor.
Have you sold stock recently? Bought? Stood pat?