One of the first pieces of advice most investors hear about the stock market when they start investing is 'buy low, sell high'. On the surface, this makes absolute sense and even seems like a no-brainer.
After all, successful investing is usually built on the foundation of buying quality assets for a cheap price (perhaps in a stock market crash), and either holding onto them or selling them at a far higher price than what you paid in the first place.
But I think this piece of investing wisdom is actually a dangerous one for most investors to try and follow.
I far prefer the 'time in the markets beats timing the market' proverb.
Here's why.
If you're constantly buying shares low and selling them 'high', there's a lot of room for human error.
A lot has to go right for you to benefit from the wonders of compound interest. Successfully buying and selling shares low and high also doesn't leave a lot of room for mistakes. Even one wrong call can put you back to square one.
Does 'buy low, sell high' work?
Now, you're stock picking skills might be phenomenal, and this approach works wonders for you. But for many beginner investors, I think it's far better to pursue a 'buy and hold' strategy. Rather than picking the best times to buy and sell a share, you instead try and buy a quality investment at the best price you can, and just hold on to it.
This way, you don't have to double your workload by trying to work out when the best time to sell your shares might be. You also can harness the powers of compounding by just waiting, rather than dipping in and out of investments.
Buying shares low and selling them high requires a lot of good market timing. After all, you have to pick the time to sell your shares based on when you think the amounts are at a high point – higher than they were last month and above where they might be next month.
We all know that markets can be irrational, as well as being subject to expected events developing. As such, I think this approach is a fool's game. Here's an example that demonstrates why.
Why I prefer time in the markets, even in a stock market crash
A buy low, sell high strategy can allow fear and doubt to creep into what should be a rational and logical investing roadmap. The latest inflation data might convince you that a recession and stock market crash are on their way. So you sell all of your shares 'high', and wait for the perfect time to buy back in 'low'.
Yet it's entirely possible that the Australian economy doesn't crash in this scenario, that the ASX rallies once more and goes on a two-year bull run. Now you're sitting in cash and watching the stock market climb to new highs, all the while wondering where it all went wrong.
The stock market is full of unknowns. But here are a few things that we do know for certain.
- The markets are irrational, and no one can predict what they do next
- The stock market goes up far more often than it goes down
- We have never failed to see the stock market exceed a previous all-time high
Considering these three gospel truths of investing, it's clear that 'time in the market beats timing the market' almost every time. If the markets are irrational, but still go up more often than they go down, logic dictates that it makes sense to have as much money invested in the markets as possible at any given moment.
That's why I try and follow the maxim that time in the markets beats timing the markets. And why I think most investors should do as well.
