Buy low. Buy high. Just keep buying!

Buy Low and Buy High: Don’t time the market, you’ll miss the good stuff

‘Buy low and sell high’ is possibly the oldest and most famous adage in investing. The panacea of making money in the stock markets. Incredibly easy to say, not so easy to do.

It all comes down to timing. Timing the market and identifying when to pile your money in, and then when to pull it all back out again.

When trying to time the market, you are looking to find the ‘low’ point and then pile your money in, pulling it back out again when you feel that market valuations are ‘high’. The intention is to miss out on most of the downside and enjoy the growth. With this strategy, you could spend lengthy periods completely disinvested, or ‘out of the market’, waiting for the right opportunity to get back in.

It sounds great in theory but, in practice – it rarely works; Academics have studied this extensively and find little evidence of consistent success over time. To start with, no-one truly knows when a market is at its lowest, or when valuations have peaked. If we did, why is everyone so shocked when markets come crashing down?

Also, what begins as such a seemingly rational, simple strategy of buying at the bottom and selling at the top, then becomes a game of the mind. We become emotionally invested, complacent and unwilling to let go at times when things ‘just keep going up’, then quick to sell when things come crashing down. In times like these, we end up selling at the bottom in response to a fall, waiting for things to recover, then buying back in at the top. Quite the opposite of what we intended.

In times of crisis like the present, it can be all too easy to want to pull all your money and run. We become embroiled in the panic and bearish narrative of the media and convince ourselves that we must act to in order to survive. It encourages investors to shoot from the hip and act on impulse. We feel that we must do something, to feel some sort of control and agency. Behavioural finance experts liken making decisions in such circumstances as trying to drive whilst suffering with vertigo.

As we pull our money from the markets, and take our ball and go home, we then writhe in the pain of the realised losses we have made. When we sell out, that big minus figure becomes a reality. We become a hurt investor, sick at the thought of reinvesting, scared to love again. These periods of mourning and apprehension see us miss the resultant rebound and recovery, and the opportunity to right the wrongs and earn back what was lost. Fear dictates the moment.

This is unfortunate as every major financial crash since the 80s has, although been painful, also been graced with a period of strong recovery in the years the followed.

Performance of FTSE 100 Index during and after crisis…

Source: FE FundInfo 2020

Remaining invested through these periods would have been tough, going against many of our most basic instincts. Tough, but worth it. Since 1975, the UK stock market has fallen more than 20% 9 times. That’s roughly once every 5 to 6 years. What that statistic doesn’t tell you is had you invested £10,000 into the UK stock market in 1975, and left it, it would now be worth over £2 million.

Don’t allow short term struggles to risk your long-term rewards. Stay invested in the market and buy at the highs as well as the lows. Buy low, buy high – Just BUY. This way you won’t miss the inevitable, newly bore opportunities. With great devastation comes great innovation, don’t blink for too long or you may miss it.

How you invest over time may change, be it one fund manager over another, this allowing you to capitalise on changing styles at different points of the economic cycle. Changing styles is fine, prudent in fact and highly recommended with the right process.

But, above all else, it is crucial that your money is always at work, exposed to the new and unforeseen opportunities that await in the rubble of the crisis.