After the old accountant retired and turned in his keys, his co-workers were eager to search his desk for the mysterious piece of paper he kept there. Each work day, like clockwork, he would arrive at his desk, unlock the bottom right drawer, remove a small 3x5 card he kept there, study it for a few moments, and then return it to its safe resting place under lock and key. A small crowd gathered to see what the accountant had written that he studied so faithfully. The card read, “Debits go on the left, credits go on the right.”
Sometimes we need to be reminded of the basics. Perhaps it would help you to write down your investment goals and refer to them frequently. One of them would likely be that, generally speaking, your long-term mindset is to “buy low and sell high.” You may have noticed by now that this is a devilishly tricky thing to do well. That’s why having a plan in place to guide your decision-making is so important. Here is a bit of self-evident logic that your plan should take into account: You can’t buy low and sell high if you . . . sell low instead of buy low.
Of course, you say, that would be self-defeating. Yet, many investors have indeed been “selling low” of late. The recent market volatility has raised their fear levels. Here’s a small collection of recent headlines:
“Market uncertainty grows as tariffs shake bonds and investor confidence”
“Consumer sentiment tumbles as inflation fears spike”
“11 ways to prepare for a recession”
“Dollar resumes fall as investors wait on trade talks”
“People are more worried about their jobs now than during the pandemic when everything closed”
Consider this question: What would you expect the news to be like when the stock market is trending downward? Bad, of course. If the news is good, stocks are up. So, we might paraphrase the old axiom as, “Buy when the news is really bad (because that’s when stocks are low), sell when the news is really good (because that’s when stocks are high).”
Fear-generating headlines like those above can cause investors to momentarily forget that when prices are low, they should, if anything, be buying. The idea is to accumulate more and more equity shares over a lifetime of investing, riding the long-term prosperity of the U.S. economy. A plan of dollar-cost averaging — where you invest the same dollar amount at regular intervals (e.g., every payday when you contribute to a 401(k) plan account) — can help you do this. At times like these, when your investment dollar is buying you more shares for your money, you might even consider stepping up your contributions if possible.
Having said this, here are two clarifications. First, continuing to buy low is prudent only in broadly diversified portfolios. When your additional purchases go into an indexing approach such as SMI’s Just-the-Basics strategy, or into actively managed portfolios with risk management built in, such as SMI’s Fund Upgrading and Dynamic Asset Allocation strategies, the high degree of diversification helps protect you from isolated blow-ups. (Don't be confused by our encouragement to buy into strategies that may be currently selling specific positions. By adding capital to these strategies now, when prices are low, you'll benefit when they eventually signal that buying opportunities are at hand.)
This is in contrast to continuing to buy into the falling share price of an individual stock, which can be foolhardy. So, yes, buy low, but in a diversified portfolio where your ultimate success depends on the overall economy and not a single company or industry.
Second, buying low doesn’t mean prices can’t go lower. How low is low, anyway? You won’t know until months after the final bottom. All you can do is determine to be a buyer at prices that appear low relative to their recent highs. In early-April, the market briefly touched a low –21.3% below its February high, before subsequently rebounding. It’s been an unnerving ride down, and it may not be over. But buying at almost a 20% discount level is a sensible act if you’re a long-term investor (say, a 10-year timeframe before you’ll need this money). You may soon have the opportunity to buy at 25% or 30% discounts . . . or you may not.
Staying the course in this type of market environment requires patience and fortitude. Long-term investors should embrace the opportunity, not run from it.
