Best Advice: Gary Belsky

I've written several "best advice" pieces (see my best advice category for details) and love to hear short takes on what financial "experts" view to be their best piece of financial advice. Over the next several days, I'll share some of these from a Bankrate article on best personal finance advice and give you my comments on them. Today, we'll hear from Gary Belsky, co-author of "Why Smart People Make Big Money Mistakes and How to Correct Them":

Be afraid when people are greedy, and greedy when people are afraid. It's basically, "Buy low and sell high." In general, I've been doing better than market averages when I've been handling my investments. I've basically done that by being conservative when the market is frothing and aggressive when the market is down.

I agree with him 100%. Moving against the flow is one of the great ways to make money in America.

How do I put this into practice? A couple ways I can think of right away:

1. I've recently bought MORE shares in index funds when the market has dropped and people are panicked. For details, see Going Against the Flow and Now's a GREAT Time to Invest.

2. While many are moving away from housing/struggling with it, we're looking at the downturn as an opportunity to buy. Of course, having no debt and a lot saved up for a great downpayment or outright property purchase puts us in a good position to take advantage of this opportunity.

What about you? What do you think of Gary's advice?

Click here to read part 2 of this series.

Comments

[BuildAndSucceed]

That's a really good point and I was actually thinking the exact same thing the other day...

I'm in Southwest Florida where real estate went absolutely crazy not too long ago... EVERYONE was buying and wanted to buy. People were practically fighting to buy places lol. Now, everyone's screwed. I have a handful of friends that are in financial trouble because of their real estate purchases. They thought they'd be able to sell for higher now.

Well... Now everyone is desperate and I think it is a good time to buy. Yet, nobody wants anything to do with real estate now.

It's funny how life works. I'm glad I learned this. Too bad I'm not ready to buy this time around. But I will be buying index funds.

[segfault]

For a minute, I thought the title was "Best advice: Gary Busey." Now that would be funny!

[Bill Sorah]

Hi - as an investment professional in Philadelphia I just had to comment. Please don't take this the wrong way but I think you're stating the obvious. Everyone always talks about buying low and selling high but I can show you behavorial investing statistics from Lipper and other major stat firms that show that the general investing public does the EXACT opposite. Most people...believe it or not, tend to buy high (after the investment, whatever it may be, has already hit its upside movement) and sell low (because its in a sell off and they are afraid). So, we tend to say one thing and actually do another. Why? I believe its because we don't develop a PLAN for each investment position that we own. Specifically, do RESEARCH prior to buying any asset class and determine beforehand what exactly you are trying to accomplish with this position. Is it capital growth, is it income, is it tax-loss harvesting? What are you trying to do? Next, determine when you intend to sell the investment. If you buy at 20 tell yourself...I am going to sell at 25 or 15 no matter what. Now you have locked in your max gain and loss and you should stop looking at the market after you make your sell. If you approach investing with this type of discipline you will see much more realistic returns and you will ultimately feel like you have much more control over your personal portfolios.

[CT]

I completely agree with this. A simple test is to check what the mainstream news is saying about the market and assume the market will head in the opposite direction. If the front page of the New York Times has a headline about how tech stocks are soaring and their employees are becoming millionaires overnight, its probably a good time to sell your tech stocks and walk away with the profits. If the nightly news is talking about how the housing market is in worse shape than it has been in for 50 years, its probably a good time to buy a house.

If you have several different asset types that you can move money between freely, you can build that sort of logic into your investment behavior by maintaining your asset allocation. For example, lets say 6 months ago you had 10% of your money in a real estate ETF, and 20% in an emerging markets ETF. Right now, your real estate ETF would have lost money, while your emerging markets ETF would have increased in value. If you calculate the new percentages, the real estate ETF would probably be around 8% of the portfolio, while the emerging markets ETF would be at 26%. You could then sell shares of the emerging markets ETF and use those profits to bring the real estate ETF back up to at least 10% of the portfolio. If you rebalance regularly, this would force you to sell on the way up and buy on the way down without having to think about it.

[The Dividend Guy]

This is much easier said than done - buy low and sell high. However the psychological barriers to doing this are huge and most people do not succeed at it. As one of the other commenters said, the key is having a system that guides your actions so emotion is taken out of the equation.

[FMF]

Bill --

Stating the obvious is my specialty! ;-)

To me, a key is in what CT noted:

"If you have several different asset types that you can move money between freely."

You have to get your finances in order so you have a positive cash flow. Then you need to see the opportunities (a big drop in the market, the housing drop, etc.). Finally, you then need to take action.

I DON'T do this with individual stocks (I don't think you can buy low and sell high with them -- at least with any confidence), but when the total market drops or an industry like housing goes down, there are opportunities for people with cash.

[cami]

While, I understand the general advice, I think that you still have to be careful. As Bill Sorah said, you need to do research. Instead of saying, 'housing is going down so I should buy', look at a) why you want to buy into the housing market, and b) why the housing market is going down. If you do the research and find that the fundamentals are solid, then go ahead. But if not, I would say hold back. There are probably a lot of people who bought tech stocks in the summer and fall of 2000 when everyone else was getting out, and likely still haven't recovered.

[Kevin]

Advice is always better in hindsight. But what time frame do you go by? Do you wait until the market has been going down for weeks or months? Same with housing - if you really want to "buy low" do you go now or wait another year? There is no real "market" to watch other than comps on similar properties, which aren't as easy to come by as pulling up the Dow Jones.

[LotharBot]

The advice in general is good... but in the specific example of housing (and, really, in general) do enough research to know if you're really buying low, or if you're buying not-quite-as-high-as-everyone-else-but-still-too-high. In some areas, housing prices have dropped to the point where it now makes sense to buy. In others (like Seattle) we just came over the top of the bubble and are in for a long slide.

There's a balance to be struck... if you wait too long, the market starts going up again and you end up buying not-that-low. But if you're too quick on the trigger, you get something that was overvalued and hasn't dropped back to its true value yet.

[Swim Upstream to Wealth]

If you look at the works of Nobel Prize winning economists, you will find that their studies show that the best plan of action is to diversify, reduce expenses,and minimize taxes. With a long term perspective, this is the best recipe for investment success.

These Nobel winners are PhD economists who studied mountains of data, AND they have no interest to find one conclusion over another (meaning they aren't money managers with a vested interest to promote any style of investing). Rex Sinqfield, a winner of the Nobel Prize for his studies on portfolio composition and capital markets, calls diversification the only "free lunch" in investing. Sure, there are the occasional folks who thump the markets like Warren Buffett. But, he is the Tiger Woods of investing.

Rather than wonder if you are buying or selling at the right time or trying to guess if you are buying an out of favor asset class, you can build a diversified portfolio of passive investments (index funds and ETFs) and rebalance systematically. Then you can go spend time with your family, play golf, or watch football.

[Lord]

One shouldn't try to time equities, but one must try to time real estate.