buy low, sell high
The "Buy low, sell high" paradigm in investment is predicated on the ability to "time" the market. Everyone wants to say that they bought a stock at the lows and rode it all the way to the highs before cashing out. Newsflash, it's virtually impossible to do. Also, trying to time the market can be extremely painful for investors.
The chart below could be for the price of a stock or a bond over time. You might look at it and seek out what you think will happen next and try to time an entry/exit. It's actually a random line graph but our brains can be tricked into trying to see a pattern and extrapolating forward. It's how we make sense of the world around us.
Seeing patterns where none exist in investment, also known as apophenia, can be a common pitfall for investors. This can lead to making poor investment decisions based on false signals or coincidences.
Research conducted by Dalbar in the US has consistently found that average investors underperform the index due to trading at just the wrong time. Trying to beat the market can lead people to invest heavily on recent winners (extrapolating the chart upwards) and sell down their portfolio when volatility spikes and markets drawdown, thus missing out on the subsequent rally.
Another factor to consider when thinking about market timing is the cost of trading. The marginal transaction fees and taxes associated with additional activity in the portfolio is paid away. Each time that happens it depletes the capital that is able to compound.
Finally, remember your benchmark (which hopefully you are trying to beat) is fully invested. If you sell down part of your portfolio and hold it in cash and get your timing wrong, it's a relative recipe for disaster.
How can we help ourselves?
Market timing, even for professionals is not impossible, it's just really hard. The odds are stacked against you.
It is important for investors to remain objective and rely on sound data and analysis rather than relying solely on perceived patterns. By understanding the principles of statistics and probability, investors can avoid falling into the trap of seeing patterns where they do not actually exist and make more informed investment decisions.
