Timing The Buy Low/ Sell High Strategy

The automatic buy low/sell high strategy is just one of the multitude I have studied, and is especially popular among financial reporters and columnists. Like other strategies, it has pros and cons.

           

Moreover, the procedure is not as simple to use as it first appears, particularly when applied by average investors, who usually have difficulty in its implementation.

           

Studies do show that buy low/sell high strategy may return more than haphazard, in-and-out market trading, but only if it can be disciplined. That effort can be a questionable undertaking.

The natural tendency for anyone with a trading account is to stay attuned to the market and constantly, actively, overreact to its influences. Few investors, including professionals, can master that discipline, in an attempt to determine highs and lows, amidst constant chatter.

           

The main disadvantage: Many of this strategy’s adherents are not disciplined. They wind up attempting to time what they feel are appropriate buying and selling points. They thereby become common victims.

           

The strategy can work to an extent, if used as part of a strict asset allocation program. If, for example, under a 60/40 equity/bond program you periodically adjusted by selling the portion that rose and then buying what fell, you would have strategic implementation. Doing so by precise formula would be your discipline.

           

However, this strategy makes it difficult to observe duration principles on bond holdings. There are times when the proportion of long-term, intermediate and short-term bonds have to be arranged to meet investor cash needs, and duration becomes a factor.

           

This rearrangement of assets can also cause a good deal of taxable trades in accounts that are not tax-deferred, such as retirement. Selling for asset adjustment can make taxable events, and have to be kept to a minimum.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)