Buy High and Sell Low
By Ralph Smith
Monday, August 25, 2008
The way to make money in the stock market is to buy low and sell high.
That is common sense. Buying shares of stock when they are relatively inexpensive makes sense. And selling stocks when they are much higher, and locking in your profit makes sense also, especially if you are selling stock funds that are within a retirement plan that does not add to your tax liability when making a profit on selling stock funds as the Thrift Savings Plan enables participants to do.
Buying low and selling high is more difficult than it sounds though.
Right now the stock market is down. It has been going down for a number of months so shares of the TSP funds are much less than they were way back in October of 2007 when the stock market hit record highs. If you want to buy stocks when their prices are depressed, and sell them when they are much higher, this might be a good time to be buying more shares of the S, C and I funds.
So how are TSP investors reacting to the recent declines in the stock market? They are selling their shares of stock funds. Last month (July 2008):
- TSP investors transferred 2.4 billion dollars into the G fund.
- Most of this money came from the C fund from which TSP participants transferred $826 million;
- the I fund from which they transferred $831 million;
- and from the S fund from which they transferred $359 million.
- TSP participants also transferred $413 million from the lifecycle funds.
Way back in April of this year, one of our articles contained this paragraph: "A down market such as the one we have been experiencing often ends with a large sell off that occurs when investors are beginning to wonder if the market will ever go up again. In other words, when the pessimism becomes sufficiently widespread, many investors will simultaneously decide to sell their stocks and accept their losses. Once that occurs, the market often starts to head back up thereby ensuring that those that sold have just lost money."
So what do the transfers in July 2008 mean for investors? More investors are getting discouraged. They are feeling the heat of watching their TSP portfolios sink in value. The result is that they are locking in their losses they have experienced with their stock funds. In effect, they are probably selling their stock funds at low prices and will buy more in the future when the prices of the C, S and I funds go back up.
When will stock prices head back up? No one knows with any certainty. But what has been true in the past with all investors (TSP investors are not unique in their tendency to sell shares of stock when the prices are at their lowest point), is that the selling increases rapidly just before the stock market starts to go back up again.
As of this writing, the market is down about 11% for the year. The I fund is down almost 19%. This is not an abnormal swing in the stock market. Of course, we can look at the drop in housing prices, the volatility in oil and the usual uncertainty surrounding an upcoming presidential election and make predictions that the market is about to take a big jump up or down with historical data to sustain the prediction. But, since no one knows with any certainty when the market will jump back up, selling shares of our TSP stock funds involve risking your ability to build your portfolio back up when the bull market returns.
The problem with investing in the stock market is that human emotions are always involved. We panic. We celebrate. We prognosticate. Ultimately, we hope to retire and have enough money to retire in comfort.
Anyone who makes a decision to sell stock funds in the current market is taking a risk. That may be a wise move if the market keeps declining or it may ensure that you have sold your TSP stock fund shares at a low price and will miss a potentially rapid uptick in the value of these funds when the market recovers. If you choose to sell your stock funds, understand the risk you are taking.
You can see the monthly results of each of the TSP funds here in the TSP corner. Remember to keep your emotions in check and to try and avoid buying high and selling low.
© 2009 FedSmith Inc. All rights reserved. This article may not be reproduced without express written consent of FedSmith Inc.
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