Buy low, sell high? It’s seldom that easy

To some investors, now might look like a good time to invest in the stock market. Growth stocks are trading at what are seen as undervalued levels and they might be helped in coming weeks by lower oil prices and higher-than-expected earnings being reported by some companies.

As a result, those on the sidelines looking for an opportunity to get back into the market might be tempted to ask, “Is now the time?”

After all, investors should seek to buy low, shouldn’t they?

Well, sure, if they know when the low point is. Others believe it might be a good time to get out of the market. They point out that interest rates are likely to keep rising, that the cost of repairing the damage in the Gulf States is high, and that the prospect of recession early next year still hangs in the air.

It’s a difficult decision to make. But then it always is. So much so that in most cases timing when to buy or sell into the stock or bond markets is generally considered ill-advised, as few investors can get it right. Buying stocks or bonds at what seems like a low point at the time might prove to have been a relatively high point as the market drifts lower in later months.

But sometimes you do not have any choice. When you receive new money to invest, for example, you need to decide when and how you are going to invest it. In that case, do you wait until the market falls so that you receive more for your money?

Similarly, when you need to withdraw money from the market, and you have a few weeks in which to do so, you might be tempted to watch the market to try to determine when it is at the highest point so that you receive the greatest amount possible.

Also, you likely will want to adjust your portfolio as you move closer to retirement, moving money out of stocks into bonds, for example. Do you try to time a market peak or trough to do so?

In all cases – whatever your decision – you are, in effect, implicitly timing the market.

We suggest, however, that you resist any temptation to do so.

Russell has studied investment managers for 35 years and we have not found anyone who can effectively get market timing right more than once or perhaps twice.

Our studies of the ups and downs of the market and the inability of anyone to effectively time the market leads us to this conclusion: The way to decide when to buy and sell investments is to do so on the basis of your needs, not what the market is doing.

If you receive money, therefore, and you want to invest it in the market you should do so immediately. Do not try to time a market bottom as you are unlikely to succeed in doing so. After all, some of the best investment minds in our country regularly get it wrong.

The same principle applies to selling your investments. Do so when you need the money, not when you think the market is right.

Similarly, if your lifestyle changes or you need to adjust your portfolio because you are moving closer to retirement, do so regardless of market conditions.

History – and Russell research – have shown you should stay invested according to the mix you have decided, whether that is 60 percent stocks and 40 percent bonds or 80 percent stocks and 20 percent bonds. You should change that mix only if your lifestyle changes – as you move closer to retirement, for example.

Above all, avoid changing your investment mix because of market changes.

Of course, you should buy and sell investments now and then to ensure you maintain your selected asset allocation. If your allocation is, say, 60 percent stocks and 40 percent bonds, and market movement causes it to become 65 percent stocks and 35 percent bonds, sell 5 percent of your stocks and invest the proceeds in bonds to bring the balance back to your chosen level.

But make sure you rebalance because the proportion of the investments changes, not because of any market timing decisions.

For the rest, don’t tinker.