INVESTED: In Markets, in the Future, and in Society.

Dispelling the Buy Low, Sell High Myth

Author: Rob Van Wielingen — President and CEO, Viewpoint Investment Partners

Consider the total return of the global stock market from the bottom of the COVID-19 bear market:

Our brains look at this chart and immediately send us the signal that we “missed the move.” It would be folly to put money to work so close to the all-time high! We should wait for the market to pull back before putting in fresh capital.
 
However, this is a classic example of a behavioural bias that is detrimental to investors.
 
The cliché of buying low and selling high is just that – a cliché. As this Forbes article points out, historical data does not support the notion that investing cash when the market is high is likely to produce lower future returns. In fact, according to J.P. Morgan, investing on the days the S&P 500 closed at an all-time high can actually produce better returns than investing on the days when the market didn’t set a new record.

In fact, the 5-year cumulative returns following declines in the stock market (i.e. “buying the dip”) are lower than the cumulative 5-year returns after the market sets new highs – let that sink in.

With a disciplined model, an investor would make more money buying the stock market at all-time highs than they would buying markets after a 10%, 20% or 30% decline.
 
There is no way to know where the market will go next, and our brains are constantly playing tricks on us. In addition to utilizing Viewpoint’s well-researched data relationships to make intelligent and unbiased investment decisions, there are a few other simple tips that investors can employ to avoid succumbing to behavioural biases:

1. Think outside of the local stock market: A commitment to diversification is helpful in combatting behavioural bias.

2. Harvest the benefits of time diversification: Commit to adding to your portfolio consistently over time, regardless of market conditions (i.e. “dollar-cost averaging”).

3. Focus on what you can control. Develop a plan and have the discipline to commit to it. 

These three simple concepts can benefit both individual investors as well as larger institutional investors.
 
We’re all human, after all!

Still curious? Read more of our insights HERE.