“Trust your instincts.” That’s what they always say, right? Sometimes, that’s good advice … but not when it comes to managing your money. Your behavioural biases get in the way of a far more obvious (if not so easily implemented) approach: Buy low and sell high.
How do you escape an instinct-driven merry-go-round of instead buying high and selling low?
Here’s one trick: Whenever you’re wondering whether you should buy something because of its popular appeal, take a deep breath and count to 10. Recently, I’ve been fielding queries about these current faves:
- Should I buy more stocks? They’ve been handily outperforming bonds.
- Can I create some financial buzz by investing in green energy or medical marijuana stocks?
- Canadian banks have really been going to town. Should I get in on that?
Funny, I never heard anyone asking about buying bank stocks during the 2008–2009 financial crisis. Billionaire Warren Buffett (“our favorite holding period is forever”) was one of the few with the grit to profit from those fire-sale prices.
It’s very easy to look in the rear-view mirror and find out which stocks or sectors have been sitting pretty lately. The more relevant question is: What will do better in the future? Extrapolating past performance isn’t the answer, because:
- By the time you’re aware of good or bad news, the rest of the market knows it too, and has built it into current prices.
- It’s unexpected news that alters the next stock price; by definition, the unexpected is impossible to predict.
- Any trades, whether they work or not, cost real money.
Rather than trusting your instincts, why not manage the financial factors you can control:
- Minimize costs.
- Form an investment plan and stick with it.
- Capture returns available by participating in expected long-term market growth.
- Maintain diversified holdings to dampen market risks.
If anything, this strategy helps you reduce, not pile into recently outperforming stocks. As Buffett and many other billionaires will tell you, that’s what it takes to buy low and sell high.