The only method to consistently buy low and sell high when investing

One of probably the most incessantly cited investment suggestions (or clichés) is that it’s best to buy low and sell high. This is so simple as it’s unhelpful.

While this recommendation is clear, there is barely one proven method to implement it consistently: through a tactic called “rebalancing.” This is a vital point to have in mind when the summer slump sets in.

Despite the frenzy of activity on the last day of July when the Federal Reserve hinted at rate cuts for September, summer leads to fewer trades and frequently worse performance. Although there isn’t any hard and fast rule, August has historically been the second worst performanceas month of the 12 months and very low trading levelsbecause of holidays and other summer activities.

This could suggest that the gains you could have made in your portfolio over the course of 2024 could decelerate. It also tempts some to attempt to time the market with a sell-off. The statistics on this also solid doubt on whether you’ll succeed well in doing so.

Instead, ignore the talk within the markets and apply a proven method to make profits.

Why rebalancing works

When you begin investing, you invest a hard and fast amount in several assets depending on how much risk you desire to take and what investment style you select (lively or passive tactics). But because the market moves, certain assets perform well while others decline in value. In a properly diversified portfolio, it will occur on a regular basis.

But over time, better-performing assets outweigh worse-performing assets, leading to a portfolio that now not reflects your original allocation.

To restore balance, you might want to sell among the assets which have performed well – selling at a high price – to purchase more stocks which have performed poorly. You are essentially buying the poorly performing assets at discounted prices. This essentially achieves the “buy low, sell high” principle.

To maintain the diversification and balance of your portfolio, you might want to do that rebalancing a couple of times a 12 months.

Figures support the practice

In 2020 Morningstar analyzes The advantages of rebalancing span a 26-year period dating back to 1994. Despite the weak market performance on the time because of COVID-19, a one-time rebalancing per 12 months showed similar performance to a buy-and-hold strategy (without rebalancing).

However, the buy-and-hold strategy is significantly riskier since it has a much higher equity allocation (in comparison with the 60% stocks and 40% bonds portfolio analyzed by the researchers). For example, when evaluating over 20 years from 1994 to 2014, buy-and-hold without rebalancing was the worst metric because lots of the investors were obese in stocks before the tech downturn in 2000, leading to significant losses that were slow to recuperate.

Ironically, the very best performing strategy was each day rebalancing, which most investors avoid due to the trouble involved.

Choose a date and keep on with it

The best method to incorporate rebalancing into your investments is to easily pick a date within the 12 months, mark it on the calendar, after which rebalance on that date yearly.

This permits you to rebalance without having to contemplate market timing.

Why don’t we would like to time the market? Investors are notoriously bad at this.

According to S&P Dow Jones Indices, greater than 90% of skilled investors underperform a basic index fund over a 20-year period. Charles Schwab Study found that investors who had poor market timing and invested $2,000 annually for 20 years ended up with a complete of $121,171. This was significantly worse than investors who invested the cash immediately annually and ended up with a complete of $135,471.

While the Schwab study obviously found perfect timing of the market to be the very best, it is much rarer to seek out an ideal market timer than a booming market in August.

Instead, set a date and keep on with it. You can select a time like your birthday or certain times of the 12 months – just like the summer lull – to get your portfolio back so as.