As Warren Buffet once said, Investing is simple but not easy. A majority of investors believe that the key to investing in stock market is to 'buy low and sell high'. But this piece of advice is not as functional as it sounds for the following couple of reasons:
- We don't know when and if the lows are happening:
It is extremely hard to time the market. The past performance never guarantees a good future. The movement of the market is never consistent. At times, it moves collinear in a single direction for relatively long periods of time. This puts the investors looking to buy low and sell high at a big disadvantage. At other times, the market shifts so rapidly that what seems like high prices one day becomes the new low for the next day.
We are inclined to think of the market as a sine wave when in reality it tends to move in a linear direction with random surges and dips. It is impossible to judge whether you are in an upward trend or a sudden low.
- It goes against our natural instincts:
It is our natural instinct to protect ourselves in times of crises. When the market experiences a low or an economic weakness, we automatically prepare ourselves for leaner times. When stocks fall, we dump them to de-risk ourselves and when they rise, we buy more because it looks promising with growth. We sell a stock when the prices start to fall because we are afraid of losing more money. Also, our herd mentality influences us to invest where everyone is suddenly interested in because we don't want to miss out. This causes us to buy when a stock rising.
When economy starts to hit a low, people sometimes end up losing their jobs so they wouldn't put their liquid assets at risk. This causes the money to dry up in the market. We are not always ready to buy low and sell high because it is against our natural instincts.
So what would be the solution to this? Do we lose potential income by choosing to play safe or do we put our hard earned money at such a high stake?
The best way out would be to invest our money in SIP plans of mutual funds because SIPs naturally buy low and sell high. The two main problems discussed above naturally lose their potential when it comes to mutual funds, especially SIPs. The reasons being,
1)Your fund manager, who is well experienced, decides where to invest your money and when. An everyday Joe cannot balance between watching out for a low/high in the market 24*7 while managing his job and personal life. But a fund manager can, because he is well experienced to identify the signs in a market before others could catch on.
2)You don't have to decide how much units to buy and when. When you invest in SIPs, you automatically buy low when the prices fall in the market. When you redeem your units, all of them are priced the same. However, the profit margin is high for the units that you bought low. So you would have paid a lower average which in turn would yield higher returns. This naturally results in you buying low and selling high – all without worrying about any disadvantage.