How Do You Buy Low and Sell High?

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I foolishly spent years outside the market when all the “trusted” experts on the Internet were talking about the ever-present impending collapse of the financial system.

“Look at all those suckers,” I said to myself.

Little did I know, the sucker was me.

Oh well.  Not the first time.

At least now I’m smart enough to know when to cut ties with a so-called “expert”.  You can only take an expert being wrong for so long before you have to concede that their expertise is not all that great.

“No one has yet discovered any other formula for investing which can be used with so much confidence of ultimate success, regardless of what may happen to security prices, as Dollar Cost Averaging.”

-Lucile Tomlinson

Lucile has made my life much easier.

For those who are unaware, dollar cost averaging is an investment schedule where you invest a set amount every month.  Rather than taking a huge chunk of your savings to invest at once when you believe the price is right, you divide that amount over time and invest it in regular monthly intervals to hedge against the (very real) possibility that your ability to time the market is less than you think it is.

Because it very likely is.

Some months will be higher than others, but the idea is you spread your risk out by investing at these regular intervals.  You’ll buy during some expensive periods and you will catch some sales.  It all averages out.

Unless you are investing in a roaring bull market where every month is higher than the month before, of course.

History says eventually that sucker is going to drop, so you can take advantage of the discounts then, as opposed to somebody who dumped in their entire savings when the market was riding high.

If it never does drop after all?  Well, that would be a first, so”bully” for you!

Feel free to share that pun with your friends.

Please note, though, this only works when investing in broad market index funds.  Anything more specialized, like a specific market segment or an individual company, carries much more risk and renders this philosophy useless.

For example, let’s say you are really interested in Company A (not a real company, just a fictional company used for comparison’s sake).  Company A could do really well or really poorly.   It could take off and become Apple or Microsoft.  It could also go kaput.  At which point, it really matters not the frequency with which you bought your shares or at what price.  They’re all worth zero.

A broad market index that covers the entire stock market, on the other hand, will always be there as long as the market is.  Over time, the indices have ebbed and flowed, rose and fell, but never went away.

Take the S&P 500, for example.  This index is effectively an index of the 500 largest, mostly American with some international, companies on the market.  The list changes every year, with some companies replacing others.  So, even when some companies on the list don’t do so well, they are replaced by a newcomer who will try to stick.

But Is It Apocalypse-Proof?

When investing in an index fund like this, the only real risk of it going to zero is if the entire stock market folds and goes away.  None of us have ever lived in a world (in the US at least) where this has been a reality.

Since we have no history of this to go off of, I will make a speculative guess.  If the economy is in such a state such as the entire stock market goes away, we all have much more important things to be concerning ourselves with than our 401ks.

Of course, you could always ask your house robot for advice at that time.  Assuming you are still in control of it rather than it being in control of you.

But that’s a different story for a different blog.

And in case you think I am just another yahoo rambling about this topic on the Internet, which I may be, there is a study to back this up.  You will read in Benjamin Graham’s The Intelligent Investor, which I recommend to anyone who is interested in investing, about a study done by the above-mentioned Lucile Tomlinson.

Tomlinson’s study analyzed 23 10-year purchase periods of the Dow Jones, with the first ending in 1929 and the last in 1952 (yes it’s an old study, but that’s a long period of data which includes the Great Depression, so a good sample).  The average profit at the end of the 23 periods was 21.5 percent, exclusive of dividends.

That is great performance over a period of time that had big swings of ups and downs.  The fact that it removed all the guesswork and made investing easy with confidence?  I can see why Tomlinson felt the way she did.  Great results without the guesswork of trying to time market bottoms.

Recommendations

My first recommendation is that you don’t invest your money because of what some random person on the Internet said, such as me.  My investing recommendation is to educate yourself, ask questions of professionals, then make your own decision as to what is best for you, not what is best for me.  My articles are to shed insight into what I am doing and to provoke thought.  What I am doing may or may not work.  I believe it will, but I make no guarantees to anybody else.

There are a number of great books on the market and the best book on investing could still be The Intelligent Investor.  It is stocked with great data and experience over decades and is considered the gold-standard in terms of investing by people like Warren Buffett.  Warren is a smarter investor than me, so I will take him at his word on this one.

And don’t forget another more recent gem in Tony Robbins’ Money: Master the Game.  Check out all the related books and others’ suggestions too.  This is your money and your future, so take it seriously!  That’s about the only advice I’ll actually give.

What are your thoughts?  Do you invest according to a set frequency or have a favored index to invest in?  Let me know in the comments below.

*As always, this article is not meant to give financial advice. Past results are not a guarantee of future returns. Everyone must do their own due diligence and determine the money managing and wealth building strategies that work best for them. Information provided here is meant to provoke thoughts, not provide recommendations. Investing in the stock market is risky and there are no guarantees.  Investors could lose their money.  This is not personal legal or investment advice and may not be appropriate for all readers. If personal advice is needed, readers should seek the services of a qualified legal, investment or tax professional.
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