Launa sent me to the store to buy bananas. I was expecting them to be .69 a pound but when I saw they were only .49 a pound I bought more than she asked for. I like a bargain and when I see one I stock up. I am even worse when it comes to clothes. My family is well aware that my closet is filled with shirts and jeans that still have the labels attached. I know I will need them eventually so it only makes sense to buy them when I find them at a great price.
On the other hand, I don’t like being taken advantage of. During the spring of this year there was no way I was going to pay those high prices for toilet paper. No worry, we had plenty of supply from a prior sale. If we didn’t have something and it was overpriced, we would do without. Or we would buy the bare minimum. I think most people are like us to some degree. We all like a great deal.
That is why I am often confused by investor behavior and the way people buy stocks and other investments. One of the most common methods I have seen goes something like this. A person calls up and says, “Can you buy me some ABC stock because it’s really been going up a lot lately.” This same person would never walk in a store and upon finding bananas at $5 a pound think, “I need to buy a whole bunch of those because they are getting so expensive.”
The flip side of this is the person who calls and says, “Can you please sell XYZ stock because I see it has been going down.” Really? So if you go to the store to buy some new clothes and find out the clothes are on sale do you wait and come back another day? All investors love to quote the adage “buy low and sell high” but in practice it is much more common for them to do the opposite. Perhaps the confusion comes from misunderstanding the adage. What it should say is “buy a stock for less than it’s worth, and sell when it’s trading for more than it’s worth.”
Buying or selling investments based solely on price movement is like running out to buy real estate because everyone else is. (Sound familiar?) Or dumping an investment because it is currently out of favor. It is critical to know the “why” behind the price movement. In many cases the movement begins to drive itself, opening up opportunities for those willing to invest against the crowd.
This has been, and will continue to be, a year of rapid stock price movement. Be very careful about buying or selling something just because everyone else seems to be doing it. Price movement can be a factor, but it is often the least reliable one. As I say, “Know the Why, before you Buy.”
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
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