It’s actually pretty much the worst possible advice for most people when it comes to personal finance. It gives casual investors the impression they can reliably time the market when the opposite is true. It also gives them the impression that savvy professional investors can reliably time the market and give them better than average returns, even after accounting for much higher fees than simpler index funds.
So then it’s better to buy high and sell low?
First tell us how you know the value is low or high. Is the Dow today (at a new record as I was driving in) low or high?
It’s better to put money into a good low-cost index fund on a regular schedule, no matter how the market is that month, and hold onto it for many years.
The Dow is at a high because there is no other option. Some day, this will change.
This isn’t necessarily true. I was just briefed last month on funds that have - even with maximum fees included - consistently outperformed the S&P on the 5- and 10-year rolling scale.
It’s not that index funds are brilliant or not. It’s that the secret is buying and holding. Every time I see one of those ‘can’t beat the index fund’ things the challenge is always against market timers who are actively - key word there - trying to beat the market. But good investments - whether index or not - held at length have always performed well.
You know–just to be clear–I wasn’t actually asking for advice about how to invest. I was asking which is better–to sell something for a lower price or a higher price? Those are the only two propositions.
That looks like wondering about advice (whether or not you personally were asking for advice). So, no, the “only” advice cannot be “buy low and sell high”, because it does not tell you how to implement it.
One proposition is to A) buying a well diversified portfolio with a risk profile matching what’s appropriate for your investment timeline and counting on your investments to appreciate in value over time, with occasional relative dips in value.
The other is to B) naively ignore thorough research and believe you can reliably pick investments to buy while they’re ‘low’ and sell them when they’re ‘high’.
If you believe the only proposition is that prices are either low or high and you need to figure out which, you’re doing it wrong. That’s why “buy low; sell high” is such awful advice for personal investors.
The odds that an individual fund would reliably outperform its benchmark over a 10 year period by pure chance is extremely low. However, there isn’t one individual fund. There are thousands of funds for investors to choose from.
With that many funds, you could expect a certain number of funds to consistently do extremely well or extremely bad even if their returns were entirely random.
So how do you determine if a fund is managed by geniuses or just did great for 10 years by chance? You gut may tell you that, no, they couldn’t do great for 10 years just by chance, but math tells you the opposite. They may have just been really lucky.
Of course, the important point is that if the fund was actually just very lucky, there’s no reason to think it’ll continue to be lucky for the next 10 years. There was a study a little over 10 years ago that looked at precisely that. As I recall it, they divided funds into performance quintiles over a period, say 10 years, then did the same again over at least 1 more 10 year period. The question was whether top performers stayed top performers, bad performers stayed bad, etc., and they found that no, there was extremely little persistence. Outstanding performers, even over a 10 year period, are mostly just lucky.
Which funds were they? Did the people telling you about them have lots of money in these funds 10 years ago? Probably not, because they had no idea which funds they would be. There are many funds, and just by chance some will outperform the market. Most will not. The usual figure I hear is that 80% of managed funds will underperform compared to an index (PDF). It gets worse when you account for survivorship bias (severely under performing funds go broke or get rolled into other ones)
Wow, I certainly hit a nerve, I’ve never been called out as a liar on the SD before.
Buy gold if you want, it’s easy to transport (unlike a house), people the world over recognize its value, you can keep it at home where it’s safe, the price is fixed daily so it’s simple to convert the value into food, guns, drugs etc, and the federal government has always approved of you holding it. Buy it all, back up the truck, no skin off my nose.
JustinC: Note that none of the things you list qualify as investing.
E.g., keeping a year’s supply of food in the basement seems like a good idea to some people. But that’s not an investment.
At any given moment you only have one price. The question, which was what my answer was about, is whether the price today is good or not relative to the price tomorrow. If you could figure that out you’d probably be able to make a dollar or two.
In other words, you don’t know if you are selling low at today’s price.