2 min read
“The stock market is the only market where things go on sale and all the customers run out of the store.”
I own several shares of VTI, the Vanguard Total Stock Market ETF. Today on July 9th, 2018, the price of VTI is a little over $142 per share. If I hit the ‘sell’ button in my brokerage account, I would receive $142 in cash.
Exactly one year ago on July 9th, 2017, the price for one share of VTI was a little over $124. That means the market is willing to pay me $18 more today compared to one year ago for the exact same share.
And tomorrow the market will give me a new price it is willing to pay. It could be higher or lower than today. And it will continue to do this each day, offering me a new price, asking if I would like to sell my shares.
This brings up a simple question: Why don’t I sell my shares today? Why don’t I let the market give me $142 in cash for the same share that it was only willing to pay me $124 for a year ago?
The answer is that I don’t need the cash today. Right now I earn an active income that helps me pay the bills. I don’t need to convert my stock ownership into cash to pay for anything.
But wouldn’t it still be smart to sell my shares since they have risen in price so much in one year? After all, it’s possible that the market could offer me less money per share a few months from now. Shouldn’t I take advantage of the fact that I can sell for such a high price right now?
In theory, it’s a great idea to sell at a high price. Then, when the the market offers me a lower price in the future, I could buy more shares at cheaper prices. I could just keep doing this over and over, buying shares at low prices and selling them back to the market at higher prices.
This is a wonderful strategy. The only problem is, it’s impossible to implement because nobody can possibly know how high or how low prices can actually go.
A perfect example of this is when stock market prices flattened out in 2015:
The market kept offering prices of around $108 for one share of VTI.
At the time, many people thought that prices could go no higher. This would have been a great time to sell, right?
As it turns out, anyone who sold would have had to painstakingly watch prices soar another 40% over the next three years.
The market is tricky like that. It’s hard to time.
But when you view the market as a machine that simply offers you different prices for your shares each day, it becomes a little easier to make smarter investment decisions. In particular, here are a few investing heuristics to follow:
The simplest way to avoid buying all your shares at the highest prices is to buy a little bit each month. This is known as dollar-cost averaging.
The worst time to sell your shares is when the market begins to offer lower and lower prices.
Over the long haul, the stock market tends to offer you higher and higher prices for your shares. Keep in mind that attempting to time the point at which prices are highest is nearly impossible.
If you fear that you may need to sell stocks to pay for bills, that money probably shouldn’t be invested in the market in the first place.
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