Buy low, sell high. It’s the most logical, common-sense way to invest, right? If only it were so easy.
The problem is, our brains are not built to do the logical thing when it comes to money. We are hardwired by millions of years of biology to avoid risk.
We think we know what risk looks like and our brains help us stay away. Dark and rainy night? Take cover. Shifting sense of balance? Crouch down. Any kind of uncertainty about the terrain ahead? Move slow.
Now consider the first three months of this year. A lot of people — far too many of us — took the turn of the new year as a signal to review their investments.
Why? What’s different about January 1 vs. July 1 or October 1 or any other first day of a month? Nothing really, but we look anyway.
From that vantage point, the past several years in the stock market can look like a long climb uphill. We have no credible idea of what’s next, more climbing or a cliff’s edge, but looking backward gives one the sensation of hitting some kind of peak.
Then the reflexes tend to take over. Sure enough, a big sell-off in the market started.
Any trend can end, of course. The S&P 500 is close to back where we started the year, within spitting distance of its position on Jan. 1.
During the past two months, though, people sold a lot of shares. Other people (and perhaps some of the same people) then bought them right back. Were you on the right side of the trade? Did you buy more when stocks go on sale, like you should have?
As a retirement investor, it’s important to rise above market timing and trading and the second-guessing tactics of the herd.
And it’s important, of course, to be a buyer when prices fall. Yet you can do this without trading, without reading tons of investing stories in the press and without any special knowledge at all.
All you have to do is trick your brain.
The first step is steady investing. When you buy the same amount of investments each pay period, month or quarter, you end up buying more when stocks go on sale and shares are cheaper and less when they are relatively expensive.
The other trick is disciplined rebalancing. In an investment portfolio, it’s often the case that some types of investments will rise temporarily in value as others fall.
Sell some of the relative gainers and use the cash to buy the relative losers — that is, sell high and buy low — and you will achieve better returns over time.
After decades of using these simple investment moves you cannot help but avoid the worst mistakes investors make while taking advantage of best practices. The result is great returns.