Learn what history can tell us about “buy low, sell high” as an investment strategy.
Investment language can be off-putting to most of us – ETFs, IRAs and UGMA might as well be alphabet soup for people who want to build their financial literacy.
But “Buy Low, Sell High”? That’s relatively easy to understand. In a nutshell, it’s a long-standing idea that people should purchase shares of stocks when their price is low (a Bear Market) and sell them when their value increases (a Bull Market).
Then why aren’t more people successful at it? Here are a few reasons.
1. We’re an emotional species. When it comes to our finances, decision making is often driven by two fundamental factors: greed and fear. As humans, our emotions often overtake our logic, causing investment behavior that is less than rational.
2. We don’t like being left out. When we find ourselves on the sidelines watching others profit, we reach a point where we must make an investment, buy a piece of real estate, or deploy some cash to “get in on the action”.
As we invest at or near a stock’s peak prices, we find ourselves excited to finally be in the investment game. Our greed takes over and we tell ourselves that the good times won’t end. We take comfort in yesterday’s news but lack a clear vision of what tomorrow may bring.
3. Our memories can be short. Every decade or so brings one or a series of economic upswings: the dot-com bubble of the late 1990s, the housing market boom of the 2000s, the economic expansion of the pre-pandemic period beginning in 2010. Then, there’s the inevitable economic downturn because cycles are just that – cyclical.
4. We let the fear take over. As we ride the market down, we allow our fear of losing money take over. Consider the bursting of the dot-com bubble, the great recession, and the coronavirus pandemic. We shift to a mindset of “it can only get worse” and that overrides our greed. Driven by fear, we sell and hope to have something left at the end.
5. We repeat past mistakes. Just like before, we find ourselves waiting to invest. Sadly, the opportunity passes us by until we just can’t sit on the sidelines anymore and we repeat the cycle. Once again, we find ourselves investing near the peak, having forgotten the last experience.
It’s enough to leave you dizzy. That said, if you can’t stomach the stock market roller coaster, don’t push yourself to ride it.
If you are already invested, take a deep breath or 10 and remind yourself that prices will rise again as the market returns to normal. If there are stocks you would have considered purchasing before the downturn in companies that align with your values AND you have the money to invest, go ahead and purchase some shares. Investing is a wealthy habit and your focus needs to be on the long-term. No one can predict when prices will rise. But know that they will eventually.
At Wealthy Habits, we teach kids financial literacy lessons on investing, savings and more. Parents can find blog articles and other financial education resources on our website. We also offer low-cost day camps, summer camps and teacher training programs in the metro Atlanta area on topics such as saving for college, investing and more.