Have you ever bought roses on Valentine’s Day? Odds are you paid a premium to buy those roses for your loved one. However, you weren’t the only one. The increased demand and competition for roses on Valentine’s Day drives up the prices. Simple supply and demand.
This concept can be translated to the stock market, more specifically, investments that track specific indices (i.e. index mutual funds or exchange traded funds (“ETF”)). This is because when an investment tracks an index, it has to hold the same companies that are listed on that specific index (i.e. S&P500). When an index announces the companies listed on the index (Index Reconstitution day), there is increased trading for those companies. All of the index mutual funds and ETFs have to sell the companies that are no longer on the index and buy the new companies that are being included.
Increased demand to buy means higher prices for companies to add. Increased selling of companies means an increase in supply of shares and lower prices.
Instead of buying and selling stocks when everyone else is, be flexible in the stocks you buy and when you buy them. For example, if you want to buy General Motors for your portfolio, be open to buying Ford as well. They will have similar characteristics, and can be a good substitution for one another. Being rigid in the stock selection process may cause you to miss other opportunities or force you to buy at inopportune times.
Although Valentine’s Day is a special day for you and your loved one. I’m sure he or she would be just as happy to receive roses on February 21st as well. Your wallet will likely thank you for it too.
