Courtesy of Doug Short.
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What investment advice could be more basic than the old axiom to “buy low and sell high”? Yet, of all the often-ignored adages, this one is perhaps the most ignored of all.
Notice the adage does NOT say “buy and hold.” Huh! Ever notice that?! “Buy low and sell high” is very different from “buy and hold”! Observe:
So, if the market is “high-priced” (see below), one adage tells you to “buy” while the other adage instructs you to “sell.”
Which one is right? History shows “buying high” leads to poor long-term performance (see Wall Street Journal link in this article’s Conclusion).
Yet guess which adage most brokerage firms want you to believe! Hint: They make most of their living by selling stock-related investments and dreams of 8-10% annual returns from the stock market… so guess what they want you to buy, 24/7/365, regardless of whether you’re buying low or buying high? They seem to know only one way to “put your money to work.”
Investing a smarter way
I’m not opposed to risk or seeking growth. Most of the time, I have several “growth-oriented” investments in most of my portfolios. Some times more than others.
Before seeking growth, investors must always remember, first and foremost, how devastating “buying high” can be – even in the “long run”! Your 1st job as an investor must be to protect against losses. Your 2nd job can be to seize growth opportunities in a smart way – while never failing to remember your 1st job.
“Buying high” inevitably results in either large losses or many years of going “up and down” without really getting anywhere. Poor results are not necessarily immediate, but are virtually unavoidable at some point whenever you “buy” (or “hold”) high.
Here’s the bottom line: For best results, risk/growth strategies must be employed selectively, using an optimized, performing, compounding “Retirement War Chest” (RWC) as a storehouse for assets while you wait. (Remember Warren Buffett’s advice to “Wait for a fat pitch and then swing for the fences.” And speaking of Buffett, also remember his first 2 rules: “don’t lose money.” BOTH Buffett-isms are consistent with “buy low, sell high,” and NOT with “buy and hold.”)
Unfortunately, the “buy-and-hold” approach has delivered an extremely rough ride for the last 15 years, affecting millions of lives & retirement plans. Similarly, “buy-and-hold” has been a loser’s game during other periods like 1966-1982, 1929-1941, and so on. And it will always be a losing strategy whenever investors buy too high.
Q: Why, then, do so many investors “buy and hold”? And even more perplexing, why do people so frequently “buy high and hold”??!
A: The investment industry has successfully created the term “buy-and-hold” and turned it into the most commonly used “conventional wisdom” in the business. Simple, memorable catch phrases like “buy-and-hold” often resonate with many people. Investment firms have capitalized on that little quirk of human nature in their efforts to bend behavior and attitudes to fit their business model. Their marketing machine is well-funded and carefully crafted.
Part of the problem with most investment firms and advisors is that they generally don’t offer many (if any) good, solid, conservative, foundational, “RWC”-type investments that can serviceably complement the stocks, mutual funds, and variable annuities they love to sell. Their main “conservative” asset is simply bonds or bond mutual funds, which brokers view as some kind of necessary evil within their “asset allocation” portfolios. Not coincidentally, the higher a client’s allocation to bond investments, the lower the firm’s revenue from that client, in general. As a result of the unattractiveness of bonds (to both advisor and client), brokers often seek to minimize the ratio of each clients’ portfolio that goes into the category. Which is fine… except that brokers are overlooking good “RWC”-type investments that can help their clients, and therefore allocate far too much of each client’s money to risky stocks! Unsuspecting investors who continually take advice to expose upwards of 50% of their portfolios to the stock market won’t know for years or decades whether the market’s major ebbs and flows will somehow perfectly coincide with the most significant events of their lives, such as retirement.
Is today’s market high or low?
The short answer is that today’s market is “high-priced” by pretty much any measure – whether you compare the market to its own recent price trend, to the underlying economy, to cyclically-adjusted corporate earnings, to the book value of the companies in the market, or to anything else. Disclaimer: Again, the fact that the market is “high-priced” does NOT necessarily mean that condition will correct itself anytime soon. Markets can remain low- or high-priced for a long time. But in the end, when you “buy” or “hold” stocks at “high” levels, your returns over the next 10-15 years are extremely likely to be subpar, as has been well documented.
My advice? Don’t get greedy. Most of the “easy money” has already been made. Take Time for This portfolios show you how to build your portfolio on a consistently performing, optimized “Retirement War Chest,” and then retain the flexibility to take advantage of “opportunities” to “buy low” (with some portion of your portfolio) when possible. It’s an all-weather approach you can adopt today, using my most recent monthly guide.
Sell high… and then what?
Suppose you do choose to follow the advice to “sell high.” Then what? What do you do while you “wait” for the next opportunity to “swing” at a “fat pitch”? To me “sell” means to be predominantly “out” of high-priced assets for now, and to use other investments instead. As I mentioned earlier, my monthly guide and portfolios show you how to construct your portfolio upon a solid, “RWC” foundation of assets that remain (for the most part) available for “opportunities” when they arise. In addition, my portfolios seek some select “growth-oriented” opportunities even now.
Conclusion
Remember, the timeless advice to “buy low and sell high” is perhaps the most ignored adage of all. Don’t forget! Otherwise, what if you are one of the thousands of poor, unfortunate souls who does most of your “buying and holding” when the market is high, and makes most of your withdrawals when the market is low? Not good!
The research is very clear about what happens – eventually – when stock prices become too high. You’ll probably look back 10-15 years later and realize you didn’t make the “8-10% returns” you expected. Or worse.
For a good, introductory article about “buying high” vs. “buying low,” see this excellent Wall Street Journal article by Brett Arends, in which Mr. Arends demonstrates that those who attempt to “buy high and hold” are probably in for very disappointing results. For a more in-depth analysis (including a GREAT chart, in addition to lots of statistics), take time to read this extremely insightful, recently updated article by 3 portfolios managers in Toronto, which I originally found on Doug Short’s website a few years ago.
© Adam Feik
Take Time for This
This article is for informational purposes and does not constitute individualized investment, financial, tax, or legal advice. See additional disclosures here.
