UBS: ‘Buy low, sell high’ is a fallacy

Traders
work on the floor of the New York Stock Exchange
(NYSE).

Eduardo
Munoz Alvarez/Getty Images

• “Buy low, sell high” is a common mantra in stock markets.
• But it’s actually a “fallacy”, argues UBS’ Justin Waring.
• If you wait for the market to dip before buying in, you could
  miss out on big bull runs.
• It’s much better to just buy stock and hold it for the
  long-term, he argues.

“‘This time is different’ is not the most dangerous phrase in
finance,” according to UBS’ Justin Waring. “That honor goes to
‘buy low, sell high.'”

Waring, Investment Strategist Americas in the Chief
Investment Office of UBS’ Wealth Management division, called the
phrase a “fallacy” in a note sent to clients this week. Not
enough people analyze the phrase, which really only applies to
traders and doesn’t offer much help to long-term investors.

The persistence of bull markets means investors who follow
this advice may miss out on market gains, Waring argues.

For example, imagine an investor buys a dip in the S&P 500
and then sells once it hits a new record high. Under the ‘buy
low, sell high’ mantra, that investor would generally have to
wait for a 5% or 10% dip in the market to buy back in. But, more
often than not, the market goes on to post new record highs after
setting one record.

Waring uses data on the S&P 500 stretching back to 1960 to
back up his argument.

“These market-timing approaches’ 2.5% p.a. returns are so dismal
– and lag “buy-and-hold” so badly – that we had to switch to a
logarithmic scale to even see them on the chart,” Waring writes.

“The core problem with waiting for a market drop, and selling out
at new all-time highs, is that you’re invested during the bulk of
each bear market but miss out on most of the bull market gains.”

Much better to simply buy stock and hold it for the long term,
Waring said, as the chart below illustrates.UBS