Buy low, sell high is one of the most famous mantras in investing. It’s the investment ideal, if you could do it regularly and successfully. The trouble is, if you aim to buy low and sell high by trying to time the market, you’ll face conditions that are unpredictable.
CHALLENGES OF MARKET TIMING
Let’s start with selling high. What happens if you sell investments when markets are on an upswing, and then the investments continue to climb? You’ll miss out on further gains and be hard-pressed to invest your redeemed funds in better-performing investments. Choosing the optimal point to sell is just a guess.
The next challenge is buying low. This time, you must guess when the market, or an investment, has bottomed out. Wait too long and you can miss the rebound. Meanwhile, you’ve parked money on the sidelines, missing out on opportunities.
For individual investors, it’s this guesswork and luck that makes market timing a hopeful ideal more than a sound practice.
OPPORTUNITIES TO BUY LOW AND SELL HIGH
Fortunately, there are ways to profit from buying low and selling high apart from trying to time the market. All you have to do is follow traditional investment practices.
Invest on a regular basis. One of the simplest parts of investing—making regular contributions—is also one of the most impactful. By investing the same amount each month or other interval, regardless of market performance, you won’t over-invest when prices are higher, and you’ll buy more shares or fund units when prices are lower. You automatically buy low when the market presents a buying opportunity, and are positioned to boost your portfolio’s value when the market recovers.
Experience the wonder of rebalancing. Each investor’s portfolio is built with an asset allocation among equity, fixed income, cash and any other investments, in proportions designed for the highest potential returns at the investor’s accepted level of risk. However, each asset class can react differently to changing market conditions, causing the proportions to drift. You could end up holding too much of your portfolio in fixed-income, which limits your returns, or too much in equities, straying beyond your risk tolerance. So, your portfolio is periodically rebalanced to restore your investments to their original asset allocation.
Here’s where buy low and sell high enters the picture. The act of rebalancing redeems some of the assets that have outperformed and become too large, selling high. And rebalancing purchases more assets in the underperforming class, buying low.
Say it’s a period when the stock market plummets, and the percentage you hold in equities falls below your original asset allocation. Rebalancing during this down market would likely lead to the sale of fixed-income investments and the purchase of equities at reduced prices. That sets you up for potential portfolio gains when stock markets rebound.
Count on the money managers. The aim to buy low and sell high is embedded in every company in your portfolio, since experts chose these companies because they believed the share price would rise. This may be more obvious with value money managers, who choose stocks with low prices and high potential. But the principle is still the same with growth money managers,who search for companies demonstrating above-average growth with the potential to grow further.
Buying low and selling high is best left to the experts choosing stocks, rather than individual investors trying to time the market with their portfolio contributions.
WAYS TO REBALANCE
When the proportions of asset classes drift, several methods can restore a portfolio to its original asset allocation. Here are three common rebalancing methods.
Calendar rebalancing. On a monthly, quarterly or annual basis, a portfolio’s original asset allocation is restored by selling assets from an overweight class and adding assets to an underweight class.
Threshold rebalancing. With this method, a portfolio is rebalanced any time an asset class deviates by a specified percentage from its original weighting—for example, by 5% or 10%.
Targeted rebalancing. Instead of selling assets from an overweight asset class, new contributions to an underweight asset class bring the portfolio back into balance.
Different methods suit different situations. Studies show that any rebalancing approach used consistently will outperform a portfolio that has not been rebalanced at all. 1
1 Vanguard Research, “Best Practices for Portfolio Rebalancing,” 2015.