Monday, May 18, 2009

Buy High, Sell Low?

When teaching students about investing, one of the first adages we tell them is "buy low, sell high." What often follows is an explanation of the fact that many investors do the opposite - sometimes out of necessity - but also as a result of some basic emotions like greed or fear.

But because we each have different risk profiles, our timing may be off when it comes to investing. When a market is growing, we may put off getting in, depending on our fear/suspicion/concerns about whether or not the market is really going to continue growing. Likewise, our inability to let go of the bad or our overconfidence in our ability to pick the winners, may keep us from selling in the early stages of a market decline.

There are other reasons that we may act this way, of course. But the fact is that many of us do act contrary to the basic wisdom. There is an article (free content at this writing) in today's edition of The Wall Street Journal that illustrates what happens when investors get the timing wrong. You can certainly make a case that the selling should have been done before February 2009. But, to borrow and overuse another old aphorism ,“Hindsight is 20-20.”

Do you think this article would be worth sharing with your students? Is there value in illustrating what many consider to be self-evident? Does this open other opportunities? Another adage is "don't try to time the market." But is that another important lesson for another day, or a continuation of this lesson?

I look forward to your comments.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
3. All choices have consequences.

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