“Buy low, sell high”: investing myth?—Sharesies New Zealand
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“Buy low, sell high”: investing myth?

Explainers

In investing, we hear the phrase “buy low, sell high!” a lot. While it‘s technically true, it’s a bit of a blunt instrument—investing is a lot more complex than just four words!

26 March 2020

4 min read

“Buy low, sell high”: investing myth?

Today, we’ll pick at this phrase and show you a few other things to think about when you’re investing.

How good is your timing?

One of the big weaknesses of “buy low, sell high” is that it’s very hard to tell if you’re actually buying low or selling high! After all, “low” is relative; a share is only “low” if you eventually sell it for higher later.

Of course, there’s no way of knowing ahead of time if a share is going to go up or down. This means that when you “buy low”, you’re essentially making an educated guess. You’re saying that you don’t think an investment is going to get much lower. But you can’t know this for sure.

For example, let’s say there was a company that used to be $3 per share, but it’s been dropping over the past month. Now it’s $2 per share. If you buy now, would you be “buying low”? Maybe. Maybe not. It could drop to $1 per share, or lower. Or it could turn around, and rise. You won’t know until later on.

The same goes for selling high. Let’s say you bought some of those shares for $2. After a month, they were worth $3. Then $3.50. That’s quite a bit higher than what you paid for them, so is now a good time to sell? Again—maybe. They could go back down to $2, or keep on rising.

It’s enough to make you tear your hair out! In order to successfully buy low and sell high, you need to time the market—and timing the market is extremely difficult to successfully, consistently pull off, unless you have a crystal ball. Even the experts get this wrong!

Dollar-cost averaging

If all the analysis isn’t for you, you can try dollar-cost averaging. This gives you a lot of benefits of buying low without having to figure out if you are truly buying low.

Here’s a quick refresher on how it works: you choose an investment, and decide how much money you want to invest. Then you just invest that amount regularly over a period of time. This can be as long as you want, but we reckon the longer the better.

This means you’ll buy at different prices as your investment’s value moves around. If you’re investing once a week, and the share price changes from $1 to $1.50, then back to $1, you’ll have paid an average of $1.25. That’s a bit more expensive than $1, but you also avoided paying only the outlier high of $1.50.

With the dollar-cost averaging strategy, it’s important than when times are tough (share markets have taken a dip recently), you remember to keep on investing if you think the company will still be important in the future—you don’t want to end up only buying when things are more expensive!

Diversification

Again, with selling, you probably don’t have a crystal ball. But what you can have, is diversification. Diversifying makes the odds of your investment increasing in value over time higher (although not a sure thing, of course). If you’re invested in 50 different companies, the odds are that some of those companies will be successful.

Another strategy that can help is having a long time horizon. In other words, hanging onto your investment for a long time before you sell. It’s really hard (if not impossible) to predict short term changes in an investment’s value. But over longer time periods, it becomes a lot easier, especially if you’re well-diversified.

Wrapping up

Buying low and selling high isn’t easy to do! If you’re thinking about it, decide what ‘low’ or ‘high’ means to you. Once you’ve decided, you can even place a limit order to specify the price you’re willing to buy or sell at.

If digging into the details isn’t for you, you can dollar-cost average and diversify your investments over a long time horizon. Rather than try to make a specific prediction, these strategies give you a better shot at longer-term success in general—a lot less stressful than trying to time the market!


Ok, now for the legal bit

Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.

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