When it comes to a passive investing strategy the one thing you’re forbidden from doing is timing the market. The reason for this is that you’re starting to want to beat the market and make active decisions, the same thing that active mutual funds and other big wigs try to do with the market. I had the hardest time understanding this point because I think the most universally accepted view is buy low and sell high.

If you look at the S&P500 and if it falls below 800 points, the only thing that would pop into my head is buy buy buy. I was literally thinking of keeping a nice chunk of cash on the side just in case there was a market crash of some kind. Though I cannot properly predict when a market is going to head south, I could at least buy on the way down and profit.

I know there are many people out there that can’t shake this feeling. But I’m going to challenge you a bit. If you’re going to build up a nice lump sum to dump into a crash, how much are you going to miss out on during the next bull run? Are we going to have a crash in the market soon? I don’t know. No one knows.

Rebalancing is the Key

It took me a while to figure this out, but the act of rebalancing is the key to buying low and selling high. If you have a well diversified portfolio, you’re going to have some items going up and others going down. The act of rebalancing the portfolio is selling some of the higher growth funds/indexes and buying some of the lower growth/loss funds/indexes. In essence, you’re forced to buy low and sell high if you stick with the gameplan (your portfolio balance).

Whether this is more effective then leaving a lump sum of cash on the sideline in order to buy at a more opportune time is up for debate. Big market crashes come, but they don’t come that often. You’ll often miss out of the bull runs the market presents. If you don’t get most of your money in at the bottom than you’re really not going to return more than what a person would of made investing passively in the market.

Also with timing the market you’re becoming much more active with your investing. Like all of us, we like to see our decisions work out well. If you invest your lump sum at a time that turns out to be not so opportune, can you swallow it?

When it comes to actively timing the market in order to buy low and sell high, it just isn’t worth the risk. Even though there is a lot more money to be made if you buy right in at the bottom, the likelihood of you buying in at the bottom is slim.

Passive investing with a defined asset allocation that you objective rebalance is about the best type of buying low and selling high that you can get. I think it is the best choice and I suggest you stick with the game plan.