Buy Low, Sell High? Easy!August 15th, 2020 by Tanner Wrisley
Everyone has heard the saying “buy low, sell high”. Even if you haven’t, it is fairly intuitive and is the objective of just about every investment a person will ever make. Nothing comes easy in the stock market, but buying low and especially selling high are certainly achievable. With a good plan in place, investment success can be had by being patient and keeping risk levels in check. At the same time, miscalculating risk and bad timing can easily throw an investor off course. But if done right, buying low and selling high can be the foundation for steady cash flow when you most need it.
Buying low is probably the more difficult of the two parts. Many times, investors do not have a ton of control over when their capital is available. Additionally, “lows” are very hard to decipher.
For example, it is easy to look back at the S&P 500 this year and pinpoint mid-March as a great time to buy low. Now that the stock market has rallied back, one might look at a chart and think it was obvious that you should have bought in at that point. But in that moment, when the world was getting nothing but bad news from a new and unknown virus, and stocks seemed to be accelerating downwards, it was hard to not think they wouldn’t go down more.
At Anchor Bay, we typically employ a dollar-cost averaging strategy when buying equities.
• This means we buy in little chunks over time to help take some of the timing issues out of the equation.
• We will also rebalance by selling fixed income and purchasing stocks if our equity allocation goes below our tolerance range.
Trying to find the March 23rd (S&P’s low) might have caused many to miss the rebound, so buying in bits throughout the downturn is a great way to take away some of this timing risk.
Selling high is where investors have a little more control.
• Say an individual is 50 years old and plans on retiring at age 65 at which point they will take income from their investment account to live off of.
• For now, with a 15-year time horizon, we can be a little more aggressive and stay heavily invested in stocks. But as the investor approaches retirement we will want to peel back their equity exposure.
• After the age of 60, we can start to look for “highs” in the stock market or good selling opportunities and take profits on our terms. Then we can move this money to fixed income or other lower risk investments.
What we want to avoid is being forced to “sell low” because the investor has too much in stocks, the market has crashed, and now they are 65 and need the money to live off of.
If you have a well thought out plan and you were able to execute that plan successfully, the foundation will be laid out for this individual’s retirement. But we are not done yet because that capital base now has to last the rest of their lives and even potentially beyond.
At Anchor Bay, we pride ourselves on our ability to meet our clients’ cash flow needs while minimizing the risk to that cash flow.
• We use a combination of money markets, fixed income, and carefully selected dividend-paying stocks to accomplish this.
• Our equity selection involves well established companies that are leaders and their respective industries and have a proven track record of strong earnings and consistent dividend payments.
• We then use the interest and dividends from these securities to cover as much of the cash flow needs as possible. This allows that foundation we have built to grow undisturbed.