The golden rule of investing is simple: You buy low, and you sell high. When you do that, you make a profit. Easy, right?
Not really, of course. It’s obvious that we should buy low and sell high on the market, but knowing when we’re seeing a high or a low is a whole lot tougher than that. A lot of things can move stock values or even the market as a whole, and keeping track of all of them is pretty much impossible. So how can we do it? How can we know when to buy and sell our stocks? Well, there are a few different schools of thought. Let’s learn more!
Buy now, sell (almost) never
Figuring out when stocks are at their peak or their nadir can be incredibly difficult — some might even call it impossible. That’s why some investors say we shouldn’t try at all. They offer a simple alternative: Buy stocks whenever you put your cash into your investment accounts, and then wait until you retire to cash out.
The idea behind this logic is pretty simple. Timing the market, or even individual stocks, can be very difficult. But we know that the stock market tends to go up over long periods of time — long periods of time like the decades that stand between young investors and their own retirement date. So investors can be pretty sure of seeing a nice return over the course of their investing careers if they just invest cash steadily month after month and year after year, rain or shine. Sure, they’ll sometimes be putting cash into a market that is dropping value — but they’ll be putting cash in still when it turns around and climbs up, up, up. And because it’s probably going to go up more than down, this strategy works.
Of course, this buy and hold strategy is a safe, slow, and steady one. It’s not likely to appeal to more active investors, such day traders (even if those investors use it in their retirement accounts — which they probably should). Let’s talk about what to do with the cash you can afford to roll the dice with!
Momentum and timing strategies
Investing steadily in all markets will give you a nice return, but it’s not exactly The Wolf of Wall Street stuff. If you’re craving a bigger rush, you may want to look at timing the market or using momentum strategies to try to pinpoint the peaks and valleys of individual stocks.
You can do this a few ways. One is fibonacci trading. With Fibonacci trading, investors take a chart and mark off the high and low points. Then they use the famous Fibonacci ratios (A mathematician came up with them in the 13th century) and identify points at which the stock’s trends might reverse — a rising stock going back down, or a falling stock perking back up. Making bets at those points could help investors nail a maximum return.
Of course, this isn’t the only way in which investors try to track momentum and time individual stocks. Day traders may want to explore other ways. We don’t have time to get into all of them here, but investors should know that having a strategy is crucial. With a firm strategy and rules to abide by, active investors will be less likely to let emotions take over and make mistakes that cost them opportunities or lose them money.
Investors can try to time the market as a whole, too. Though often dangerous when used at large scales, market-timing strategies that take advantage of small peaks or dips can work wonders. Investors can make money off of market overreactions, and properly managing your risk will enable you to do so without putting your retirement funds in jeopardy.
So when will you buy or sell your stocks? It’s up to you. A simple buy-and-hold strategy is enough for many, but active investors should feel free to roll the dice with the money they can afford to lose. Buying and selling at the right times can make you a fortune.