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Welcome to the second part of our Timing the Market or Time in the Market blog series. Today we’ll be looking at capital gains and capital losses, specifically related to investing in stocks and ETFs.
You’ve likely heard the old adage “buy low, sell high” when it comes to purchasing stocks. A lot of people may have that goal, but it’s much harder than it sounds. We’re not saying you can’t and shouldn’t try to time the market to get in on the lows, but you must understand the risk you’re taking on when trying to do so.
Last week, we highlighted compound interest on a basic investment. However, market timing does not provide a smooth path to compounding the return on your investment. The return you earn on your investment may be lumpy depending on when you buy and sell your investment.
Let’s look at an example of trying to time the market by looking at a stock that has received a lot of press and attention over the last two years, Shopify. Here’s a look at a price chart of Shopify’s stock during that time:
If you were hoping to buy low and sell high your chances of doing so are greatly impacted by when you bought your first share.
If you got in on January 3rd, 2020 at $525.07 per share you probably did ok on your investment no matter when you tried to sell high:
But what if you tried to “buy low” at any of these prices along they way?
You could potentially be looking at selling low instead of selling high when the stock’s price took a downturn starting in early 2022.
As we’ve said numerous times before, the Commission does not provide advice, and we’re not advising to try, or avoid, a buy low sell high investing strategy. What we are trying to show with these examples is how truly difficult it can be to buy low and sell high. Determining what is low and what is high is not easy. As our example shows, it can be even harder depending on when you purchase your first stock.
If you are thinking about trying to implement a buy low sell high stock strategy be sure you understand the risks involved. There is no guarantee that you will make money, and you could potentially lose a large portion or even all your investment. Never take on more risk than you can tolerate both financially and mentally and do not invest more money than you can afford to lose.