Buy low, sell high—the challenges and opportunities

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 more expensive, 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.