Working in the financial industry has taught me that, if left to their own desires, many people will “buy high” and “sell low.” It seems like common sense would dictate that you want to buy low and sell high to make a profit, correct?
But what actually happens is that people truly do want to buy high, because the news is good and everyone is happy their investment account statement values keep going up. There’s no reason not to be invested, they will say.
Then, after the investment is in place, the markets cool, as they inevitably do from time to time. Values decline, and now the recent purchases don’t look so good. The news about the markets and the economy is negative, and it’s time to protect their money, even if it means selling at a loss.
This is a simplified illustration of how buying high and selling low can occur.
Frankly, this process can be fostered or even encouraged by commission-based stockbrokers who are compensated through buying and selling rather than a client’s account profitability.
If you ask about buying, the answer may be, “Sure, everything looks good.” And if you are concerned, it might be, “Let’s get you out!” Commissions to buy or sell are paid with each transaction.
I recall an experience with an investor I’ll call “Matt.” He was a smart guy, with a great business and a good sense for running his company. But he sometimes wanted to change to more aggressive, higher-equity positions when markets were strong and more conservative, lower-equity positions (even adopting a “get-me-out” mentality) when the news was negative.
Fortunately, looking back and then looking forward into the future, can help investors maintain their portfolios during the ups and downs, the surer path to meeting their lifetime financial goals.
Building a diversified portfolio based on the right exposure to risk and volatility for each individual investor is part of the value that a wealth adviser who accepts fiduciary responsibility, and is compensated not by sales commissions but through a fee for their advice, can add. Developing a long-term investment plan (see my post on the Investment Policy Statement) and sticking to it is the key to long-term potential for success in up-and-down financial markets.
Build, hold, and rebalance is a much better method than buying high and selling low.
See chapter five in my book The Eight Points of Financial Confidence for more details about how to build your diversified portfolio.