Buying Low & Selling High - Easier Said than Done


GLEN MILLS, Pa. --- Daniel A. White, President of Daniel A. White & Associates, a Glen Mills, PA-based retirement planning and asset preservation firm, suggests that even the most novice investor is familiar with the cardinal rule of investing, which is simply to buy low and sell high. However, for most folks interested in the investing world, this is a very elusive goal and almost always impossible to accomplish for several reasons.

The fine art of selling high

The most common reason many investors fail to sell at market peaks is taxes. If investors have had sizable gains in non-qualified accounts, then any sale to lock in these market gains will result in capital gains taxes. Depending upon the length of time the security was held, it could result in substantial capital gains taxes, which investors look to avoid. Many people are aware that if they die with large gains in their non-qualified accounts, their heirs would receive a step-up in cost basis and avoid the capital gains taxes all together.

A second reason purely is psychological. There is no motivation to change your portfolio when you are experiencing pleasure - but, to take advantage of the historic gains of the market, selling high has to be a firm reality for the savvy investor.

A third reason people fail to sell high is because most investors have no exit strategy when they enter the market. Very few investors set an exit strategy such as: I'll sell when I'm up 50% or I'll sell when I turn 55 years old. Not having an exit strategy is comparable to a passenger boarding an airplane with no idea where it is going to land.

Buying low can mean high success

The primary reason investors don't buy at market lows is fear. By the time the market hits bottom, people are usually scared to go near stocks because the majority of others have just lost their shirts watching the market plummet. Usually, the only advice they are receiving is "hang in there, the market will go back up." This is true, if the investor has time to ride out the downturn and is not forced to take distributions/withdrawals in a falling market. For retirees, they need an exit strategy to convert their assets into income.

A second reason people rarely buy at market lows is uncertainty. Down markets evoke fear and logically people will not put their hard-earned money back into the stock market until it has proven the worst is over.

The most important lesson for all investors is that buying low and selling high looks great on paper but is far more difficult to accomplish in real life. Many folks would be best served if they developed a reasonable, personalized "exit strategy," which considers their age, expectations and needs. This is how the market can truly be beneficial - depending on what stage of life you are in.

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