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Why you need to invest for the long term with ASX shares

I think one of the most important factors with investing is that your time horizon should be for the long­-term with ASX shares.

That doesn’t mean guessing what a share price is going to do over the next month or even the next year.

I think it’s a fool’s (little f) game to try to guess what a return would be over 12 months. You’d probably need a crystal ball!

Share market returns are based on three things – dividends paid, earnings growth and multiple of earnings the market will pay.

The dividends paid is fairly reliable and won’t change too much year-to-year for most shares. Earnings growth is a bit harder to work out, but it can be done semi-accurately, particularly if management give guidance.

The problem is that no-one has any idea what the market will be willing to pay for those earnings. It’s hard to know for both the whole ASX share market with the ALL ORDINARIES (Index:^AXAO) (ASX:XAO) or an individual share like Commonwealth Bank of Australia (ASX: CBA).

An event can make investors decide to increase or decrease the value of shares very quickly – as we’ve seen over the past month. So if you’re trying to guess what shares will do over the next year, you’re trying to guess a very difficult thing.

However, if you pick businesses that you believe will be able to increase their earnings nicely over the long-term, then this will increase the underlying value of the business, regardless of market sentiment. As earnings grow over the long-term, so should the share price, even if the valuation multiple remains the same.

Shares that I think would be good long-term investments for their earnings growth include REA Group Limited (ASX: REA), Costa Group Holdings Ltd (ASX: CGC), Citadel Group Ltd (ASX: CGL), Altium Limited (ASX: ALU) and MNF Group Ltd (ASX: MNF).

Want more long-term growth ideas? Our experts have picked these leading ASX shares as ones you should have in your portfolio.

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Motley Fool contributor Tristan Harrison owns shares of Altium and COSTA GRP FPO. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO and MNF Group Limited. The Motley Fool Australia owns shares of Altium and Citadel Group Ltd. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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