Everyone has heard the mantra: Buy low, sell high.
It’s brilliant, why wouldn’t you sell something when its value has peaked in price? Similarly, why wouldn’t you buy something when it’s as cheap as it can be? It’s like the financial equivalent of, “drive safe.”
In the perfect world, obviously we would buy low and sell high, but how do we know when the low’s the low and the high’s the high? Could the price get lower? Sure. Could the price get higher? Sure again. Should I buy now? Probably, especially if you’re thinking about buying a diversified index fund. We can do our best to predict what’s going to happen in the future with numbers, formulas, analytics, computers and even experts for guidance, but it’s still not 100%.
Why am I suggesting that you should sometimes “buy high?” Because the fund could go higher, in fact it probably will go higher. Sure there are some valleys along the way, but you don’t know when they’re coming. And what if the valley 6 months from now is still higher than the current price today? You not only missed out on getting in at a relatively low price, but you’ve probably missed a few dividend payouts along the way.
It’s all relative-what may seem like a high price today, will seem like a deal if you look back from the future. On that note…
Let’s all imagine if in the movie Back to the Future, the 1950-2000 Sports Almanac was a 1950-2000 Stock Market Almanac. I really don’t think the movie would change all that much. Sure, you’d have to change the scene of them listening to the football game to them listening to the opening bell, but that’s an easy switch. Then you’d have to change the scene when the guy says, “I wish I could go back in time and put some money on the Cubbies” to “I wish I could go back in time and buy stock in Amazon and Google,” but that’s it, the movie is the same.
Going Back to the Reality of our current situations, unless we are given information on future stock market prices by our future selves, we have no way of knowing where any stock will go from here. Maybe the current price is as low as it’ll ever be again.
Similarly, let’s all imagine if in the movie Point Break, the surfboards were cars. I really don’t think the movie would change all that much either. Sure you’d have to change the name to The Fast and the Furious and substitute Paul Walker for Keanu Reeves, but that’s about it. No financial analogy here, just wanted everyone to know that I know what they did there. Let’s continue. Vroooom.
This is kind of a shout out to Lump Sum Investing. Oh no, not another post about Lump Sum Investing vs Dollar-Cost Averaging?!? Nope. I will not mention dollar-cost averaging again in this post, but I do have a future post coming with a little twist on the subject, hopefully the anticipation is manageable.
For those of you that have never heard of lump sum investing, basically if you find yourself with a large amount of money, it’s statistically better to invest it all at once rather than incrementally over time. Vanguard published a study recently which compared lump sum investing with an alternative, the one we will no longer speak of, at least for the remainder of our time here. They confirmed that you’re better off investing the lump sum if your goal is to have more money down the road, but did say that the other method offers some protection against the down years. Again, we don’t know exactly how the market will behave in the future, so the right methodology is based on your comfort level.
If you’re investing for the long run, you’re best off getting your money in now, whether you feel the price is low or high. A diversified index fund like a Total Stock Market or S&P 500 gives you an inherent buffer for when some companies don’t perform well, because many more will perform well. Look at any chart over a 20+ time period, the market goes up over time!
See, it trends up over time. Sure, it’d be nice to buy the valleys, but it’d be detrimental to be on the sidelines while it is soaring. So how about you just buy now?
Vaya con dios!