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Buy Low, Sell High - Why You Can't Make Money Investing In The Stock Market Or Can You - The Biggest Un-Truth
Is This A Good Time To Increase My Investments?
I was watching HLN’s Clark Howard the other day and he brought out an important topic on investing. He had received a letter from a watcher that asked if with the market doing so well, is this a good time to increase your market activity and investments. Not surprising to me, he said it was not. Why is this? Why would an expert in finances say not to increase the amount of money you are investing in the market?
The answer is simple, you want to buy low and sell high. I would bet that everyone understands what that means, but unfortunately most people do not live by this simple little rule. How come? Let’s put it bluntly, we are followers by nature. We tend to follow what other people are doing, rather than listening to common sense. Let me explain my comment.
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Human Nature Is Against Us
By nature, people want to protect what they have. You work hard for things you have, whether it’s money, your house, car or the Playstation you have. Of course you want to protect it, keep it safe, and not lose it or break it. After all, what is the purpose of getting those things and not being able to enjoy it? This mindset is what causes most people to lose money in the stock market.
“You can’t make money in the market” or “the market never makes money”. How many of you have heard those words before? I know I have, especially in my own family, and guess what; my family is NOT full of millionaires. Imagine that no millionaires in my family, although they all know how to make money, “put it in the savings account and gain interest.” My father, late in life, saw the error in that statement and began investing. I am convinced if he had not passed away at an early age, he would have been a millionaire. In only 10 years he amassed nearly half a million dollars and in another 10 he would have made $1 million (which is a whole other story).
The Normal Investment Cycle
Here is the normal persons investing strategy, (it’s also depicted on the graph to the right.) First sitting down with co-workers and/or friends, we begin to complain about how bad the market has been and how your 401k has dropped. “The market is so low, I am not getting in the market?” (Wink, wink). As time goes on the conversation changes to, “the market is improving, if it continues to get better, I might invest.” And then too “Wow, the market is going great, I am going to invest now.” At this point you are very happy with your self.
Then there is a drop in the market, but that’s ok, it was not much, it will come back, you think to yourself. So you keep an eye on the market and it continues to drop, but it is still higher than what you bought it for, and you know it will come back. It finally drops lower than what you bought it for, but you can’t sell know, it would be a loss. Finally you have had enough, you lost 50% and it is time to get out, so you sell. Wait, it’s now lower than what you bought it for. Now you sitting down with your co-workers and/or friends, you complain how your 401k dropped and how the market is so low and you are not getting in now, because you always lose in the market.
This scenario plays out at every watercooler, kitchen table, cafeteria or bar stool around the country, I have even had it myself once. One question I do have is your car breaks down, and you are not a mechanic, why do you bring it to a mechanic and not a banker to fix. Because the mechanic is the expert, the mechanic knows how to fix it not the banker. So why would you take investment advice from someone who loses money in the market and not from people who make money in the market? For example, there is this guy that has made millions in the market, his name is Warren Buffet. Mr. Buffet has a simple strategy, “buy when people are scared and sell when people are happy.” In other words when people are scared the market is down, it is time to buy. When people are happy and comfortable, the market is high, so sell.
Examples Of What I Mean
Let’s take a look at the last market crash and fall. On March 6, 2009, the market hit 6443, by mid may it was up 30% and by the end of the year it was up 60%. Although the market lost 54% prior to March 6, 2009 what would have happened if people increased their investments or at the very least kept it the same. Many people moved their money to “safe investments” like savings accounts and CD’s which now pay less than 1%. With inflation at 4% they just LOST 3%. If they kept the money in the market they would have made their money back. The money they could have added would be up 60%. As of today 12/31/2010, the market is at 11600 which is 80% increase since March 2009. If you would have invested $1000 in March 2009, that $1000 would now be $1800. A 5.5% CD, (I can’t remember when they were that high), the same $1000 would be worth $1087, so who was better off?
Yes we did lose 54% prior to that. Let’s look at this too. In March 2009 starting with $1000 and losing 54% leaves you $460.00. Moving this to a CD you would at 5.5% you would have $504.27 by 12/31/2010. Me, starting with the same $460.00 keeping it invested I end up with $828.00. It’s still lower than what you started with, yes it is, but it’s also $324 higher than putting it into a CD, and which one would you like to have?
What if we both add $1000 to what was left of our first $1000? You know have a $1460 CD at 5.5% which grows to $1600. I on the other hand have $2628. “But the market will go down again and you will lose all that” you say. True the market goes up an down, that is how it was designed. The difference though, I don’t get greedy. I set up a order to sell my investment when it gets to $2500. In fact every time value reaches a milestone I set a sell price. For example my account grows to $3000 and if it drops to $2750 I sell my investment, if it goes to $3250 my new sell limit is $3000. In other words you take your profits when you can.
My Advice - Take It Or Leave It
What is my advice on investing? Buy low, sell high and don’t get greedy. The market goes down, but it also goes up. When it’s down buy more, when it starts going back up, take profits when you can and set limits. Above all, don’t panic. Doing this, I can guarantee you will do better than fixed interest accounts. Good luck.