As a prelude to an article in our coming quarterly Newsletter, we wanted to go over the high points of the most desired investment philosophy of many investors, but for some reason often one of the most evasive, “buying low and selling high.”
Again bearing in mind your time for reading this report we are going to keep this at a very high level. First let’s assume you have two assets (better known as your allocation.) Investment A has 50% of your assets and investment B has 50%. This allocation can be of stocks, bonds, Net Worth or anything you like, but for this example let’s just call them A and B.
Investment A goes down by 15% and investment B has no change. Your new allocation is now A 42.5% and B 57.5%. Bear in mind your total allocation to Asset A is only 50% so your actual alloction only goes down by 1/2 of the investment (A -15% means only 7.5% net loss.)
Here is where most investors make their mistake. Rather than rebalancing, selling high, (Asset B) and buying low (Asset A), they often do just the opposite of selling the low asset, Asset A, buying more of the high Asset B.
If it is this easy, why do so many investors make this mistake?
Because it feels good!
Buying an asset that is going down makes you feel like a dope, and most of the time there are headlines, professional investors, and neighbors telling you how well they have done by owning Asset B. No one wants to feel like a dope, but sometimes investing involves just that, being an outcast and doing what others are not.
The most important part of this philosophy is making sure investment A and B are correct for you and also that they have a chance of eventually coming back, or going up. Granted investing involves risk and no one ever knows for sure what is going to happen in the future, but that is why long term historically you earn higher returns by investing.
Yes, sometimes we have to feel like a dope to invest correctly, but eventually most investors will be paid back handsomely by feeling like a dope at one time or another. JK