Doesn’t it sound obvious and simple, buy low and sell high? Everyone understands that if you buy something for $2.00 and sell it for $4.00 then you make money and if you buy something for $4.00 and sell it for $1.00 then you lose money. So why don’t most investors do exactly that?

Why don’t people buy low and sell high?

First there’s the jargon, “investor.” You see if you invest in a company, such as your own business, of course you’re not likely to quickly sell it to the highest bidder and if you have a troublesome moment, you’ll nurse it back to health. People get attached to actions in the same way. You hear things like “ooh, I just bought 100 shares of Google, Microsoft, or Bank of America.” Now they treat those shares as if they actually belonged to their company. If it goes up a lot in price, they keep it and brag about it; when it goes down, they feel bad for the company, not themselves. You will hear them say something like. “I know it’s a great company and it’s coming back. In the meantime, its portfolio isn’t growing in value.”

How to grow your nest egg

I think your responsibility is to make your retirement savings grow steadily, not worry about Bank of America. Hopefully, you bought the Bank of America stock to make money, which means you should have made sure they were really low priced and at a good deal when you bought them and you should have a plan for when you sell them. Are you going to sell it when it doubles or when you’ve earned 25% or whatever you’ve intelligently decided is a reasonable price to achieve? To do this intelligently, you’ll probably need to consult a chart, so you can see what the stock has done historically.

You have to know from the point that you’re buying that stock how high it can reasonably be expected to go. If you bought Ford or Citibank when they were at $2.00, in the heart of the recession, it’s quite reasonable to expect them to double from there. What about when Ford was almost $1. Now it’s over $10. That is what the Buy Low Sell High trader is looking for. The well educated trader Buy Low Sell High probably got between $10 and $14. You see they are not invested in Ford, they just want to grow their retirement account. However, Citi hasn’t seen that kind of monumental rise and the savvy Buy and Hold trader had to settle for a double, selling around $4. When he trades, he must let the market tell him when to buy and sell. Maybe he was hoping to triple his money at CITI, but the market has turned and it’s time to sell, as it’s too dangerous to hold, so he comes out and realizes he doubled his money. Not too bad, and you managed like a professional dealer at Ford.

What should I exchange?

The problem with stock trading is that you have to worry about what’s going on behind the scenes. Remember Enron and the “off balance sheet accounts” that showed him losing a fortune while the balance sheet looked great. And the problem with mutual funds is that you have to worry about the manager and the manager’s ability to choose stocks. I like ETFs where you can find an exchange traded fund that doubles almost any sector of the market you could want. You want to own gold buy GLD, you want to own good gold stocks buy GDX and so on.

Also, the sectors cycle so you can see more clearly when they are too low and ripe to buy and when the sector is ready to sell. Some sectors are traditionally better for trading in these changing markets and others perform better in strong trending markets, such as the 20-year bull cycle.

The challenge

The biggest challenge with buying low and selling high is that you have to buy when everyone around you is yelling sell, the louder the yell, the better the buying opportunity, and you have to sell when everyone is eager to buy. The talking heads are proclaiming that the markets can’t go anywhere but up and that’s when you HAVE TO SELL! Fortunately we have excellent indicators that help us know what to do and we can love the media and forget about it.

So I hope I’ve given you something to think about. Your job is to grow your savings and nothing else.