You might have heard the famous expression about buying stocks at low prices and selling at high prices. The idea is to avoid the emotional impulses of getting greedy or fearful at the wrong time.
But sometimes, it can be easy to go overboard. You sit on your hands, waiting to try and perfectly time a stock's bottom.
Do yourself a favor, and don't play that game. You'll never time the bottom, and that's OK. Here's why.
The odds are stacked against you
The stock market reacts to the world's daily information and events, things nobody can predict. The market can be having a great day, and a geopolitical event, an economic report, or remarks by a critical policymaker can all send the market scrambling at any moment.
Individual stocks can be even more irrational. Investors can send a company's stock on huge up-and-down swings on earnings reports. A company can face challenges, and investors can lose confidence in the stock. Someone who bought shares in 3M at the worst of the 2020 COVID-19 market crash would now be down on their investment more than three years later.
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Professional funds with deep pockets use computers and analysts to try to uncover patterns. Still, Warren Buffett showed how difficult it was to predict the market by winning a famous bet against a hedge fund simply by investing in a passive S&P index fund. Ultimately, you can't predict stock prices, which makes buying at the bottom a wild guess with low odds.
Here's what you can do about it
While you probably won't buy a stock's exact bottom, you can tip the scales in your favor with dollar-cost averaging. This investment strategy is where you slowly build an investment by purchasing shares a little at a time.
Imagine you wanted to invest $1,000 in a stock. Instead of buying $1,000 in shares at once, you might space that out as 10 $100 purchases made every other month or so. Your buying price will average out as you make these purchases over time.
You'll be happy you started buying if the stock keeps rising, and you'll be relieved as you average down if the share price falls instead. It's a lower upside but a higher floor. As the saying goes, a bird in the hand is worth two in the bush.
Building a portfolio with this mindset
Instead of trying to perfectly time a two-footed jump into each stock you want to own, consider dollar-cost averaging into multiple stocks in your portfolio. Buy a little of stock X at a time, some of stock Y, and a dab of stock Z. Your portfolio will enjoy averaging its costs across all the stocks you own, and assuming you invest in blue chip stocks, their steady growth and earnings are likely to eventually push your portfolio higher over time.
When you zoom out and look at the long-term trends, you can see the broader stock market generally moves higher over time. You don't need to perfectly time a bottom to build wealth. Instead, you only need to hitch your wagon and let a diverse portfolio of high-quality stocks do the heavy lifting.
