Is Buying Low and Selling High Really That Hard?
February 8th, 2015
By Scott Sarber, President
Over the last few weeks I have had many client conversations about the current
market conditions. The first thing I would like to point out, is that I do not have many of these types of conversations when the stock market is doing well, only when it is in decline, which provides additional insight into behavioural finance. I think this is mainly due to media dramatization, which leads to investor anxiety. When the term “bear market” is constantly being used, the negativity begins to impact rationality.
Investors also suffer from Recency Bias, which is drawing a conclusion about the future based on what has happened recently. For example, if the market is going down, Recency Bias would convince us that it is going to continue to decline, which leads to investor anxiety, fear, and poor decisions. If the market is going up, Recency Bias would convince us that it is going to continue to go up, increase our confidence, and again, lead to decisions that may negatively impact outcomes.
My client conversations have fallen into two basic categories:
(Client) Have you seen what is happening to the stock market? How much longer do you think this is going to continue? What is my portfolio value as of today?
(Advisor) Yes, we are constantly following the global markets. I do not know the future direction of the stock market, however I do not think the current trend will prevail for the long term. Your current market value as of yesterday is _____. We are getting ready to rebalance the account to take advantage of these market conditions.
(Client) Rebalance? You mean buy more stocks? Throw good money after bad? (Advisor) Remember, we want to buy low and sell high, so we are going to sell some of the investments that have relatively outperformed, and purchase more of the investments that have underperformed. It is not that they are bad investments that need to be replaced. The whole asset class has declined, so we want to purchase more of that asset class to return to our target levels.
(Client) The market has been a little crazy lately. I do not see what all the fuss is about, have you rebalanced the account yet?
(Advisor) The market has declined approximately 10% in the last few weeks, which is not that unusual. After reviewing your portfolio, the equity and fixed percentages are within a 3% band, however there are a few asset classes like emerging markets, which have declined more than others. We are anticipating rebalancing client portfolios soon.
(Client) Good, if the market goes down another 10%, do another rebalance.
(Advisor) Of course!
Historical Declines of S&P 500 Index 1946-2013
*Source: Dimensional Fund Advisors
As the above table indicates, the stock market is subject to downside volatility on a fairly regular basis. During these times, it is important to stay the course that has been set by your financial planning professional to ensure long term investment success. Part of a good investment strategy is to rebalance the portfolio to its desired targets. Rebalancing is a proven strategy that works. It is not throwing good money after bad. It is buying low, and selling high, which is exactly what every investor knows they should do, but the emotions of losing and making money prevents most of them from being able to do it.
Is buying low and selling high, really that hard? Yes, it is.
Even when the market is going up, it is hard for investors to sell the “winners”, and buy more of the “losers”. In reality, most investments do not turn out to be winners or losers, but go up and down in a cyclical manner. Rebalancing takes advantages of the cycles that regularly, but unpredictably occur in the markets.
Buying low and selling high takes a disciplined investment approach, and most investors lack the discipline necessary to make the decisions without emotions ruling the day. That is one of the reasons why having a competent, experienced, and trusted advisor is so important. An advisor has been through market cycles will look at the investments objectively, and make good decisions. The advisors at Petersen Hastings are here to serve committed investors with complex financial needs to enhance and preserve wealth, especially in times of volatility and investor uncertainty.
If you are having concerns about the recent volatility within the market, please contact your Petersen Hastings advisor to help set your mind at ease.
*Past performance of any investment is not a guarantee of future results. Investments may decline in value, whether they
have been performing above, near, or below expectations. This article is distributed for informational purposes and is not to
be construed as specific investment advice.