Thursday, September 9, 2010

Buying High and Selling Low

I recently came across an article on about generation y'ers who are shunning stocks in their investments in favor of cash and fixed income.  To the untrained eye, this is a valid investment move.  Many of these people have come of age in a "lost decade", where the DOW and SP500 haven't moved in ten years, and the NASDAQ never fully recovered from it's previous high.  They have also seen two major stock market crashes, one of which led to the deepest economic recession since that great one back in the 1930's.

After reading through their stories, it's pretty obvious these decisions are why many investors never make money in the stock market.  We all know the old Wall Street saying "Buy low and sell high", but for many investors the opposite is more accurate.  When the market is strong and gaining, they jump in.  When it gets volatile and drops, they get scared and pull out, effectively buying high and selling low.

Through most of the generation y'ers stories, a common tale emerges.  They invested in the market, and in 2008, when it nose-dived, grew worried and moved into a cash portfolio.  Now, they are all waiting for the market to "recover and stabilize" (ie go up in value) before they reinvest.

While I am a dedicated investor, I realize not all people are, and that's ok.  I can understand that many don't have the stomach to invest, just as I don't have the stomach to perform surgery.  But the difference is in the fact that I know I don't have the stomach to operate, so I don't do it.  These people obviously don't have the stomach for aggressive investment, so it's in their best interest to not do so.  While I feel the stock market is the best way to grow your wealth and beat inflation, it will not be beneficial to your portfolio if you sell on drops and buy on rallys.  For some people, a conservative portfolio of bonds, cds, mma, and cash is the best option.

One can only conclude that knowing yourself and your tolerance for risk, and acting accordingly, is a major factor in the future successes of your portfolio.  If you don't know how your emotions will influence your decisions, you are sure to make many costly mistakes.  

The Cnn article can be found here

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