Buy low, sell high, right? Ah, if only we knew exactly when the market was at an all time high and about to go down, or at an all-time low and about to power up, we’d all be billionaires. Unfortunately, while it is dead easy to see you should have sold around May 2008 and bought around February 2009, there’s no “future performance” chart to look at to know what to do over the next few months. Given that markets are in retreat right now and prices are falling some of us are left trying to decide should I buy now or wait a bit longer? Have prices reached the bottom yet?
Market Timing Isn’t Possible
Ok everyone has agreed on that right?
But if, like me, you have some money sitting in cash ready for your next round of investing, you still have to pick a moment to click Buy.
And while the detached analytical types will just say “I always buy on the 15th of the month” or something similar, many of us will stare at the day’s chart and dither. Now? Tomorrow? What if the TSX rebounds 200 points in the next hour? I’ll be mad I didn’t buy now. But what if it drops another 500 over the next 2 days? What’s the rush to lock in if it’s going down?
Let’s be clear about this: There is NO WAY to know when is the best time to buy.
Wishy Washy Investors Suffer GREATLY from Buyer’s Remorse
Unlike the detached analytical types, who admittedly are most likely to end up with the highest overall portfolio value for the same number of dollars invested, Wishy Washy Investors spend a lot of time agonizing about their mistakes. They beat themselves up for buying when the TSX is at 14 900 if the next day it drops to 14 700.
They also end up waffling a lot trying to avoid Buyer’s Remorse by procrastinating. Obviously, that can have an even worse impact on their investing decisions.
So they need a strategy to buy (and sell) that lets them blame the strategy, not themselves.
(Yes, I know at least one reader is screaming: the strategy is buy immediately when you have money to invest and you have reached the efficient point at which to buy based on commissions. However, many of us just don’t live our lives that way. Yes, some of us are also fat.)
A Wishy-Washy Investor’s Guide to Buying Low
So what do I intend to do?
Do You Have Enough Capital to Invest More than Once?
Well, I’m in the enviable position of having a tidy sum to invest, should I want to. My fixed income has grown higher than I need so I can re-balance by taking the profits of a few recently matured GICs and popping them into the equity market.
Normally, though, you have to consider the size of the trading commission versus the amount you have to invest as part of your decision process. Michael James on Money, for example, did the math to figure out how often to invest if you are a small investor.
If you only have a small amount to invest, say, $500, just use a “jumping into cold water” rhyme, hold your nose, and click on Buy. At least you’re buying when the market is somewhat down, which should feel a bit good.
If you have a large amount to invest, you can probably split it into 2 or more parts and invest each separately.
How Much Do You Have to Pay Per Trade?
I have another blessing: right now I have free trades available at both CIBC in my unregistered account and at RBC Direct Investing in my RRSP account.
If you don’t, take a look at the amount you have to invest and the trading commission you would have to pay each time you click Buy. If the market is down, say 5%, but you would have to pay 9% of your investment as a commission, that’s not really a good choice. Even 1% of your investment seems a bit steep. Do the math and think about how many commissions you can reasonably accept.
Then divide your capital into that many chunks (up to some reasonable number like 4. If you’re dividing your money into 3500 pieces it’s getting a bit bizarre.)
Execute one Buy immediately with the first chunk.
So for me, the Wishy Washy Buy Low Strategy says: invest 25% of the money now. The TSX composite is already down about 1500 points (over 9%) from its 52-week high.
Then, if the market retreats another 250 points, I’ll buy in another tranche of 25%. And repeat till all 100% is invested.
What if the Market Starts to Climb Again and I Still Have Uninvested Capital?
Well, you’d better think about that from the start, because it’s bound to happen. Look at the way the Dow bounced (in the week of October 6-10, 2014.)
Just because it goes up a bit doesn’t mean it won’t come down again, either.
So you should set yourself limits and stick to them. Perhaps you’ll pick, buy each time the market drops 1%. If the market climbs 2%, invest all the rest immediately.
The percentages don’t actually matter as much as having a clear plan. You need to have a plan, even if you’re Wishy Washy and can’t stomach just putting all of the money in the market at once and hoping for the best.
What Should You Do After the Money Is In the Market?
Walk away from your computer.
Turn off your stock alerts.
Flip the channel if the radio or TV starts reporting on the equity markets.
Don’t look again until it’s time for your annual re-balance.
I dare you!
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Do you approach investing in a cold, mechanical manner to optimize your long-term portfolio? Or do you spend a huge amount of time second guessing yourself, berating yourself, applauding yourself and generally being emotional about investing? Please share a glimpse of your investing personality with a comment.
