You’ve likely heard the old investing adage: “buy low, sell high”. Simple as it might seem, the approach is an incredibly complex one that’s challenging even for investors with decades of experience.

It’s also not exactly in line with the ethos of passive investing, which takes a more steady, less reactive approach to the share market.

Here, we’re looking at why “buy low, sell high” isn’t quite as foolproof as it seems, how it differs from passive investing, and the reasons passive investors oppose it.

“Buy low, sell high” explained

The concept of “buy low, sell high” is pretty straightforward. The aim is to buy shares at their lowest price point and then sell at their highest price point, thus ideally maximising profits.

“Buy low, sell high” traders appreciate the methodology for its flexibility; it can be applied to numerous asset classes, including shares and property . They also like it because it offers the possibility of buying shares at a “discount”. And, obviously, there's the potential for high returns.

But while the concept seems simple, executing it is quite the opposite. How do you know if you’re truly buying at the lowest price or selling at the highest? Timing the market is notoriously difficult, even for the most seasoned investors. The market can be volatile, and you can’t actually tell which way it will go. The price you buy at could go lower, or the one you sell at, higher.

In short, “buy low, sell high” is effectively a guessing game based on speculation and feeling. That’s not to say it’s entirely impossible to execute – it’s just really, really difficult.

Passive investing and how it differs

On the other end of the investing spectrum is passive investing . Contrary to active trading, which seeks to capitalise on price differences through regular buying and selling, passive investing is about buying and holding assets over the long term.

Where active trading aims to outperform the market, passive investing typically tries to achieve gains in line with an overall market or sector. Passive investors believe the market will grow over time and are willing to be patient and wait out long-term returns.

This approach is best summed up as “time in the market” rather than “timing the market”. In other words, your money is better off being invested at any given time, rather than frequently putting it in and taking it out. Otherwise, you risk leaving lengthy gaps where no money is invested.

Passive investors also often aim for a diversified portfolio . Rather than speculating on one or a few shares, they tend to go for a wider range of assets, with a strong focus on broad market instruments like ETFs . This can reduce the chances of a single asset negatively impacting their overall portfolio. They might also opt for income-producing assets, like dividend ETFs or shares.

Several investing strategies fall into the category of passive investing, including dollar-cost averaging , buy-and-hold, and index investing.

The challenges of timing the market (and why passive investors avoid it)

We’ve already established some of the challenges of the “buy low, sell high” approach in simple terms. But let’s dive into its complexities a bit more and see why passive investors don’t believe in the idea of timing the market .

There are several reasons, such as:

• Unpredictable market movements: The share market is, by its very nature, fairly volatile and very complex. It’s at the mercy of all kinds of external factors, like economic conditions, world events, investor sentiment and technological developments. Many of these are very difficult, often impossible, to predict. And sometimes, the markets move in ways that are wildly contrary to what these factors might indicate
• Market sentiment: The market can also be swayed by investor sentiment – the collective mood of investors towards a particular asset or the market at large. Investor sentiment can lead to sudden and sometimes irrational market movements
• Emotional decision-making: The fear of missing out on a particular share could cause someone to buy at a higher price than they should. On the flip side, the fear of losing money could cause them to sell prematurely. Emotions and biases can seriously cloud someone’s judgement when they’re making investing decisions, potentially leading to suboptimal results
• Feelings of stress: Not only can buying and selling at subpar prices lead to subpar returns, but it can also be emotionally taxing. The high stress of trying to pick the right entry and exit point makes many investors feel overwhelmed and anxious
• Lack of cost efficiency: Every time you buy or sell a share, you incur a transaction cost, like, for example, brokerage fees. Trading frequently means racking up significant transaction costs, possibly eroding any returns – especially if those returns are marginal
• High risk: The chances of getting the timing right are fairly slim, and there’s a genuine risk of buying or selling at the wrong point and making a (possibly substantial) loss. Active trading is quite high-risk, so those with a lower risk tolerance may be less suited to it
• Huge use of time and resources: Monitoring the movements of individual shares requires vigilant attention – a level of commitment usually reserved for day traders or fund managers. While not true of everyone, we’d hazard a guess that the average investor probably isn’t glued to their screen watching share prices go up and down
• Tax considerations: Tax is a part of any kind of investing , but one thing to keep in mind with frequent trading is that your tax liability could be higher. If you sell shares for a profit, you may have to pay capital gains tax (CGT). In Australia, if you hold an asset for 12 months or more, you may be able to access a CGT discount of 50%. Obviously, if you hold them for a shorter period, the CGT discount won’t apply

Psychology’s role in investing

Psychology has a huge role to play in investing. Think about it: despite researching all the fundamentals, getting up to scratch on market trends and doing your due diligence on a company, you may still have felt tempted to buy or sell. We bet there have been times when you've even gone ahead with a trade just because you’re driven by a feeling.

Investing decisions are often based more on emotions, and less on rational, objective analysis. For instance, if a particular stock is popular among investors, others might be tempted to buy it due to FOMO. This could very well lead to buying the stock when the price is overinflated. The same goes for the inverse. If there’s an indication a stock is going to go south, investors might suddenly shed their assets as a kneejerk reaction. This could cause them to sell when the price is low.

When taken to an extreme, this phenomenon can cause a bubble – like the tech boom of the late 1990s. Investors may be so fixated on high returns that they buy into overhyped shares or markets. This can make them buy at inflated prices and lose money when the bubble eventually bursts.

Without any sort of long-term roadmap or clear strategy, “buy low, sell high” investors may find they’re executing trades based largely on emotional, impulsive reactions to fear and greed.

In contrast, passive investing can mitigate these kinds of emotional pitfalls. The philosophy is largely rooted in discipline, patience and a long-term perspective, removing much of the stress associated with active trading. Investors are encouraged to ignore short-term market fluctuations, helping to avoid the temptation to buy or sell at inopportune points. That's not to say that passive investing is infallible, as all investments carry risk. However, it is (as a general rule) less emotionally taxing.

The prospective benefits of taking things slow

For some investors, there may absolutely be benefits to adopting a “buy low, sell high” approach. For one, there’s the potential for decent gains if they do manage to sell at the right point.

But for passive investors, the advantages of a more consistent investing strategy, such as dollar-cost averaging, can’t be ignored. Some of the main ones are:

• Simple and straightforward: Passive investing can be far easier than active investing. It removes the need to try and find the “right” time to buy and sell. Instead, strategies like dollar-cost averaging allow investors to figure out their ideal investing amount and investing frequency , then simply stick to their preferred intervals. Things are made even easier if they choose to automate their investments
• Mitigated risk: By not trying to time the market, passive investors can significantly reduce their chances of making a human error. That is, buying or selling at the wrong time by making an emotional decision. They may also lower the risk of underperforming the market by remaining consistently invested
• Compounding returns: Long-term passive investing potentially lets investors take advantage of compound returns , especially if they start early. This is when your investment earnings generate further earnings, possibly leading to exponential growth
• Opportunity for passive income: Instead of going for growth shares as many active traders do, some passive investors opt for income-producing assets, like dividend ETFs and shares. This could potentially introduce a decent source of passive earnings , if the investments perform well
• Takes the emotion out: For those who struggle with staying objective while trading, passive investing may offer a more rational way to invest. It’s all about ignoring short-term fluctuations and keeping a long-term view. This could mean less stress, less anxiety and less impulsive decision-making
• Fosters discipline: A set investing schedule can help investors stay disciplined on their investing journey, establishing a sense of routine and consistency
• Less time-consuming: Active trading requires a lot of time and energy spent researching market trends and monitoring price movements. By contrast, passive investing is mostly about "setting and forgetting"
• Lower costs: Passive investors typically execute fewer trades, because the idea is to buy and hold on to assets for the long haul. This generally means less money spent on investing fees, including brokerage and exchange fees
• Aligns with Financial Independence: If you’re working towards Financial Independence , all of these benefits tie in very nicely with the FIRE philosophy. The key tenets of Financial Independence include generating long-term wealth and passive income, low-cost investing to minimise expenses, taking a hands-off approach and making investing a strategic, not emotional, process

It’s worth mentioning that no investing strategy, including passive investing, is entirely risk-free. Although we support passive investing here at Pearler, we’re not unaware of its potential drawbacks. These include lower short-term returns and limited capacity to outperform the market.

Think about the pros and cons of passive investing before adopting it as your chosen investing ethos. It might not be for you.

Choosing the right way to invest

We’re not necessarily saying active trading strategies are bad. They certainly have their place in the investing landscape, and they may work very well for some.

However, timing the market is difficult, and we believe passive investing offers a far simpler, less stressful and more consistent path to long-term wealth building.

Passive investors prefer it to the “buy low, sell high” approach because it removes a lot of the emotion and requires less time, energy, research and constant monitoring.

When deciding on the right investing approach, consider your own financial goals, risk tolerance, time commitment and investment preferences. This can help you figure out whether an active or passive investing strategy suits your needs. A licensed financial adviser can also help you determine these factors and guide your investments.

Happy investing!