Why adhering to old investment adage might be harmful for today's investors
Weeks have passed since headlines around GameStop, Reddit investors, and meme stocks dominated the news cycle, but the old guard of investors who’ve bought low and sold high all their lives are still probably sore from all their disapproving head-shaking.
But expand the view outward from that incredible period to include the past year, and you may just realize that frenzied investing has been a recurrent theme. Whether it’s blank-check firms, bitcoin, or thematic funds, investors haven’t been shy about chasing after hot investment ideas and trends. Momentum begets momentum, and the S&P 500 has advanced to a historic degree as valuations got pushed to extremes.
Possibly the best-case scenario for an investor last year would have been to buy at the bottom of the stock market’s descent in March, then to buckle up as it rocketed to its current level. Unfortunately, hindsight is 20/20, and no one really knew in 2020 when that inflection point would be.
That’s the crux of the contrarian argument put forward by Brian Levitt, Head Strategist, North America at Invesco, in a recent blog post.
“I’m often asked what I’ve learned over the past year,” Levitt said. “Perhaps it’s simply that the saying shouldn’t be to ‘buy low and sell high,’ but rather to ‘buy high and sell higher.’”
Drawing on data from Bloomberg and Standard and Poor’s, he said the S&P 500 has hit a new high on 1,101 days since 1957, or once every 15 days on average. Out of 2,015 trading days between 2013 and 2020, he added, the market closed at all-time highs on 275 occasions, including 33 days just last year.
“That’s the equivalent of the market being at a new high roughly every other pay period (at least for those of us who are compensated on a bi-weekly basis),” he said. “Would the ‘buy low’ motto thus advise us to not invest a portion of our paychecks into the market every pay period?”
Taking the logic further, Levitt considered the potential outcome for an investor who deliberately put money in the stock market each time it closed at a fresh high. He found that implementing that strategy starting in 1987, when the S&P 500 Total Return Index first went live, would have been a better approach than simply investing on random days, with richer annualized returns observed over the subsequent one-, three-, and five-year periods.
“A rising stock market tends to reflect an improving economic backdrop, which is what many economists are forecasting now,” Levitt said. “If you believe that the world will continue to get better, as it has for most of human history, then you should expect markets to trend upward over long periods. Literally buying low therefore is an unrealistic burden we place on ourselves.”