How to Buy Low and Sell High

With the current volatility in the market, it seems that there is opportunity to exercise some market timing. However, the perennial question is how and when. How to Play a Market Rally in The Wall Street Journal offers two ways to execute buy low and sell high strategies.

Market advance/decline - For this strategy, the investor sells 10% of his equities whenever the market rises 20%. When the market falls 10%, the investor would use 20% of his cash to buy equities. This strategy would have returned 14% from December 24, 1998 to November 11, 2010. A buy and hold strategy in the S&P was flat during the same period.

Stock market capitalization/GDP ratio - For this strategy, the investor sells 10% of his equities whenever the the ratio of stock market capitalization to GDP is above 115%. When the ratio is below 75%, the investor would buy equities using 20% of his cash. This strategy would have returned 36.5% from December 24, 1998 to November 11, 2010. A buy and hold strategy in the S&P was flat during the same period.

Data for market advances and declines are easy to find. I was unable to find any current information for the stock market capitalization/GDP ratio after a brief Internet search. For now, I expect the stock market to continue being choppy with multiple advances and decliens. Therefore, I will try the first strategy as a way to do more disciplined buying and selling of the equity positions in our retirement savings accounts.

For more on Strategies and Plans, check back every Monday for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2010 Achievement Catalyst, LLC