Here’s what we cover in this episode:
📉 Don’t panic during downturns, use it to your advantage instead
💰 Strategies to follow when prices are high
🧠 How emotions can derail investment decisions
💸 Dollar-cost averaging: Set it and forget it to reduce emotional risk
Executive Summary:
Investing can feel like an emotional roller coaster, especially during periods of market volatility. The conventional wisdom of “buy low, sell high” is easy to articulate but incredibly difficult to execute. Market behavior often triggers psychological responses encouraging investors to do the exact opposite of what they should. This is especially true during steep periods of market decline.
“Just stay invested, the markets will recover,” is generally good advice. Likewise, most people understand buying low and selling high in the context of a calm market. The challenge comes with extreme volatility. We see firsthand how bear markets spook people, and how they forget all those earlier conversations about investing for the long term.
Our goal is to educate people on the benefits of a disciplined and repeatable investment process that takes emotions out of the equation.
The Psychology of Investing
When the market is booming, greed and “fear of missing out” (FOMO) tend to take over. People get caught up in the excitement, chasing popular stocks and transformative technology like AI. This can lead to herd behavior where investors stop thinking about what they are actually paying for securities and instead focus on relative performance. How am I doing compared to the market? How does my performance stack up against the stocks discussed daily on the news? How am I doing compared to my co-workers or friends? This emotional mindset leads to return-chasing and buying when prices are high and valuations are unrealistic.
On the flip side, when markets take a nosedive, the primal human instinct for self-preservation takes over. Our lizard brains don’t see downturns as opportunities to buy assets at a discount. They see threats to our well-being and trigger a fight-or-flight response. Make the pain stop! This instinctive threat response is powerful. It often causes investors to sell at precisely the wrong time: when chaos reigns in the markets and securities are on sale for steep discounts.
A classic example of this emotional cycle is the Dot-Com Bubble of the late 1990s. Companies like Cisco, Dell, Intel, and Microsoft—dubbed the “four horsemen”—saw massive price increases. Cisco, for instance, surged 3,700% over a five-year period. At the peak, investors hesitated to sell despite the stock’s absurdly high valuation. They didn’t want to risk leaving the party early and missing out on the next 1,000% gain. Yet when the bubble finally burst, the fear of losing more money drove many to sell and lock in significant losses. Microsoft fell 60% when the bubble burst in the early 2000s. It took until 2016 for the stock to recover to its prior highs. This highlights how emotions can prevent even experienced investors from staying the course during a bear market.
Implementing a Disciplined Approach
To counter these emotional pitfalls, a disciplined, repeatable process is essential. Two of the most effective strategies for a “buy low, sell high” approach are dollar-cost averaging and rebalancing.
Dollar-Cost Averaging
Dollar-cost averaging is the simplest way to ‘buy low’ over time. This involves investing a fixed amount of money at regular intervals, regardless of market conditions. A common example is contributing to a retirement plan through payroll deductions.
This automated process helps reduce emotional decision-making. By consistently investing, you buy some shares when prices are high and, more importantly, you buy an even greater number of shares when prices are low. When the market eventually recovers, the shares acquired at low prices enhance your overall returns.
Rebalancing
Rebalancing is a key strategy for “selling high.” It involves setting a target allocation for different asset classes, such as stocks and bonds, and periodically adjusting the portfolio back to those targets. For example, if a portfolio is 60% stocks and 40% bonds, and a bull market causes stocks to grow to 70% of the portfolio, rebalancing would trim the stock portion and use the proceeds to buy more bonds. The same principle may also apply to individual securities. In fact, a sound rebalancing strategy should do both.
The goal here is not to rebalance based on a rigid time schedule (annually, quarterly, etc.). Instead, it is more impactful to rebalance when a security or asset class moves outside a target range. For example, you might rebalance if an asset moves more than 20% from its target. This approach is designed to help investors trim relatively expensive assets and add to relatively cheaper ones, while keeping your risk exposure on target.
This is especially critical for investors nearing retirement. Investing 100% in high-flying stocks in the late ‘90s could have resulted in a significant loss of retirement funds when the market crashed. A sound approach is to reduce risk gradually when nearing retirement. This helps protect against a market crash on the cusp of retirement—the most vulnerable time for most retiree portfolios.
The Value of a Disciplined Approach
“Buying low and selling high” isn’t about perfection. It’s not realistic—or even possible—to perfectly time every trade. Rather, this approach is about creating a new framework for investment decisions, one that mitigates our worst behavioral tendencies to create better outcomes.
A disciplined strategy directly impacts returns and risk. By accumulating more assets when prices are lower, portfolio returns tend to increase over time. Perhaps more importantly, discipline ensures portfolio risks remain balanced and not overly concentrated in assets that have become expensive and excessively risky.
Our role as advisors goes far beyond just telling clients to “ride it out” when the going gets tough. We want to show clients concrete tradeoffs. We use our experience, training, and sophisticated planning tools to illustrate how allocation changes may impact their retirement and financial goals. In doing so, we can help restore a sense of agency in otherwise difficult times. This empowers clients to make rational, informed decisions, instead of relying on the push and pull of raw emotion. We believe our collaborative approach leads to better outcomes by helping clients stay committed to a long-term plan.
Authors:
Ryan Wyatt, CFP®, CIMA®
Nick Lewandowski, CFA®, CFP®
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This communication is provided by Wyze Wealth Advisors LLC, a registered investment adviser. All material is for informational and educational purposes only and should not be considered personalized investment advice or a recommendation regarding any specific security, strategy, or product.
The assumptions and scenarios presented are illustrative and do not reflect actual investment results. Projections are based on current market conditions, which may change. Past performance is not indicative of, and does not guarantee, future results. All investments involve risk, including the potential loss of principal.
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