One of the oldest adages in the money management business is, "Buy low, sell high." It also happens to be far more difficult than it sounds, partly because low prices (the best times to "buy," according to the adage) generally coincide with the lousiest news. But the second part, "Sell high," isn't much easier; when one of your holdings has created gains for you, it can be counterintuitive to let it go
A strategy that may be equally difficult is initiating a position, or adding to an existing position, in a security that is moving higher or is significantly off its lows.
What do you do when the best opportunities in the current investment landscape are no longer as attractive as they were a few short weeks or months ago? Maybe you bought some European or emerging market shares at the end of 2014, but were hesitant to take on full positions. Maybe you were waiting for oil to drop into the $30s or $20s before pulling the trigger on some high-quality, beaten-down energy names (as represented by SPDR S&P Oil & Gas Exploration & Production ETF (XOP)).
Have you missed your opportunity?
Don't Let the Whipsaw Become a Chainsaw
The term "whipsaw" is used when an investor or trader exits a losing position, only to be "forced" to re-enter the same position at a higher price. The term comes from the jerky, back-and-forth motion used by lumberjacks when cutting down trees (back when they used long saws rather than machines).
It's not a great feeling to pay more for something than you could have paid had you acted sooner, or later, or by having done nothing at all. But what if, given all the information available, the right move is to do exactly that -- to swallow your pride and accept that "loss," whether it's tangible or in the form of opportunity cost. Pulling the trigger and buying at prices you know are not the best you could have gotten goes against human nature.
A prospective client we met with last year -- and ended up not taking on -- had particular difficulty with this issue. He couldn't fathom the possibility of the market moving lower shortly after putting his money to work. And as a result he never wanted to put his money to work. So he has sat on the sidelines, kicking himself tirelessly as the market has moved up without him. My guess is that he is still on the sidelines, waiting for the perfect entry point -- and maybe the perfect advisor to help him find it.
An index of large-cap European stocks, Vanguard FTSE Europe ETF (VGK), so far this year is shown below:
The best price you could have gotten (as a buyer) would have been the second week in January. Should you be kicking yourself if you didn't buy, or buy enough, earlier this year? I don't know...
If we zoom out, looking at the same position over the past 10 years, buying right at those three short-term "bottoms" somehow doesn't seem quite as important.
If a stock or fund you like is higher than it was in the recent past, and you didn't buy any, or as much as you would have liked, all is not necessarily lost. There is also a reason you didn't buy at that time. You may not have had available capital then, or perhaps you were scared to lose money. The good news is that you didn't lose any money by waiting. Sometimes, though, waiting for the perfect entry point is like Waiting for Godot.
If you are considering entering a position or adding to an existing one, ask yourself only one question: Is this the best place for this portion of my portfolio, today, given all the information at hand? And don't forget, cash is always an option.