Understanding the ‘buy low, sell high’ strategy

A look at what the ‘buy low, sell high’ strategy is and how it works.
Understanding the ‘buy low, sell high’ strategy
Reading time: 5 mins

In the world of investing, there’s a motto that goes ‘buy low, sell high’ – but what does it mean? Here’s a brief explanation.

 

What ‘buy low, sell high’ means
When you invest, your aim is to make a profit – well, at least, we hope so. There are two main ways that you could make a gain when investing. Firstly, some investments will pay you an income. With shares, you’ll typically receive a dividend, and if you’ve got some bonds, you could expect to get an interest payment. Every time you get a payment from your investments, you could either cash your profits or reinvest them to potentially boost your plan. Secondly, you could make a profit by buying when the price is low and selling when the price is high. Say, you pay £20 for a share and sell it later for £50, then you’d make a £30 profit. Sounds easy, right? Well, whilst it’s a pretty straightforward strategy on paper, in practice, it can be a bit more complicated.

 

How to ‘buy low and sell high’
The idea of buying low and selling high implies that you’ll need to time the market. Put simply, you’ll have to guess when the best time is to try and sell at the bottom and buy at the top, and we’ll be honest with you, it’s no easy task. Some investors might get lucky and manage to guess when to sell or buy from time to time, but realistically, nobody can consistently predict market movements, and even less over the long-term. So, buying low and selling high is a very difficult thing to do in real life. This strategy primarily relies on share prices, and the thing is, those prices fluctuate on a regular basis and unless you have a crystal ball, it’s impossible to know where they’ll be heading next. Share prices can depend on many factors. For example, they can be determined by the forces of supply and demand – when the supply exceeds the demand, prices can go down, and vice versa, when the demand is superior to the supply, prices can go up. Now, the things that drive demand and supply can be very irrational and totally unpredictable – we’re talking about emotions, uncertainty, and any news or event, like a global pandemic for example. So, there’s no way you could guess with accuracy when to trade in order to make a profit. Luckily, there are other methods that could help you take advantage of price fluctuations.

 
Think about diversifying your portfolio
Share prices fluctuate, that’s a fact, but they don’t necessarily all go in the same direction. For instance, if the tourism industry is struggling, you may see your investments in airlines fall, but on the other side, your investments in tech companies may be doing just fine. Needless to say, the fact prices can move in different directions can make it even harder to time the market and guess when to sell and buy. Unless you feel confident in your ability to predict the future for every share in the stock market, it could be worth adopting a strategy that’ll help you mitigate risk and help shelter your portfolio from market movements. This strategy could involve spreading your money across investment types and regions, that way poorly performing investments in your portfolio should be balanced out by others doing well. This is what we, in the investment world, call diversification. And a good, hassle-free way to diversify your portfolio is to buy investment funds – they’re like hampers full of different investment types, and some will track specific markets for you.

 

Think about the long-term
Since it’s almost impossible to predict market movements, why not remain invested regardless of fluctuations? This may sound counter-intuitive, especially if markets are falling, but staying in the game without reacting to every single market upset tends to pay off. Think about it, if you sell your investments during market downturns, and wait for markets to reach their lowest level to make a comeback and enjoy potential growth, you could be in for a nasty shock if markets don’t move the way you expected. However, if you stay invested, even during the storms, you’ll remove emotions from the equation and shouldn’t be missing out on any potential growth. Obviously, your investments may fluctuate a fair bit, but if you hold onto your plan for a number of years, you’ll likely make a gain according to many studies. Take people who invested in the FTSE 100 between 1986 and 2019. Those who remained invested for any 10-year period had an 89% chance of making a profit – and some of these people were invested during the Global Financial Crisis of 20081.

 

Consider drip feeding your plan
Now, if you want to make the most of price fluctuations, there’s a simple way to do it – and it’s much easier than timing the market. By investing small amounts of money on a regular basis, you could take advantage of potential bargains during market downturns. When markets fall, investments typically become cheaper to buy, so if you leave the market at this time, you’ll potentially be missing on the sale and make your losses real at the same time. However, by drip feeding your plan, you could grab some bargains that could then see their value increase in the future – this is very similar to the aim of ‘buy low, sell high’, the only difference is that you don’t need to make guesses about market movements, you just need to accept them and make the most of them when you can.

Drip feeding, also known as Pound Cost Averaging, is easy, especially if you’re using a digital investment platform, like Wealthify. Simply set up a Direct Debit to your investment Plan, and we’ll do the rest, from picking the right mix of investments to managing your Plan on an ongoing basis.

Reference:

1: Data from Bloomberg

 

Past performance is not a reliable indicator of future results.

 

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

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