Talk About Money: When to buy, sell stock

Buy low, sell high. That’s what investors strive to do, but emotions get in the way.
When the stock market is low, people tend to be fearful of losing and shy away from investing. When stocks are high, greed overtakes fear, and investors jump on the bandwagon because they don’t want to be left behind by a roaring bull market.
Many people end up buying high and selling low, and that’s no way to manage a portfolio.
One way to remove the emotion from investing is a strategy called dollar-cost averaging. It reduces risk and can produce profits even when the market isn’t going gangbusters.
Let’s say you wanted to invest in the Santa Cruz headset maker Plantronics. Four years ago, you decided to buy $6,000 worth of Plantronics per year, in two payments. The accompanying chart shows an investor buying $3,000 worth of Plantronics every six months, starting March 1, 2006, when its share price was $34.30, and ending with the first of this month.
Over the four years, you would have made nine purchases totaling $27,000. You would now own 1,394 shares of Plantronics. At its March 1 price of 28.94, it would be worth $40,342. That’s a healthy gain of 49 percent over four years — even though the stock was lower at the end of the four years than it was when you started.
The big test of your program came March 1, 2009. Stocks were plunging, and Plantronics was down to $7.93 a share. Over four years, you had invested $18,000 into Plantronics stock, and it was now worth $6,272. Most investors would have thrown in the towel and said, “Dollar-cost averaging doesn’t work. I quit.”
That would have been a costly mistake. By sticking to your plan, you would have bought 374 shares at Plantronics’ low for the decade and a year later been in a very profitable position.
What makes dollar-cost averaging work is that your purchases are based on a fixed amount of money, not a fixed number of shares. So when the stock is down, you buy more, and when it’s up, you buy less. The problem is that it’s hard to stick to the program, especially when the world appears to be collapsing.
The late Benjamin Graham, an expert on investing and Warren Buffet’s teacher, was once asked if dollar-cost averaging could ensure long-term success. Graham wrote in 1962: “Such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions.”
But for that to happen, the dollar-cost averaging investor must “be a different sort of person from the rest of us … not subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past.”
“This,” Graham concluded, “I greatly doubt.”
• Mark Rosenberg is an investment consultant for Financial West Group of Scotts Valley, a member of FINRA and SIPC. He can be reached at 439-9910 or [email protected].