It’s easy to lose sight of the buy and hold investment strategy when markets are volatile. In the March bear market, everyone felt like they were Warren Buffett. Never mind the fact they may have been relatively indifferent investors in February, right throughout 2019 or in the years prior.
All of a sudden passive investors became active. Everyone was looking for bargains, but did it really pay off?
Why a buy and hold investment strategy is best
Let’s be clear: day trading is just gambling on ASX shares. If you buy Afterpay Ltd (ASX: APT) shares and hold them for a day or two, you may see some gains. However, I think a lot of those gains would be lost to transaction fees and taxes.
In contrast, a buy and hold investment strategy makes sense. You’re not just buying ASX shares, you’re investing in high-quality companies for the long-term. That means understanding the companies you own and believing in their long-term success. The CSL Limited (ASX: CSL) share price could go up or down this week, but I believe it will go up over time.
A recent article in the Australian Financial Review (AFR) highlighted this increase in active investing resulting from COVID-19. The article references ASIC data from February and March indicating an increase in the level of retail investors’ trading. Everyone was ducking in and out of ASX shares like Webjet Limited (ASX: WEB) as valuations soared and crashed. But this represents a form of market timing (which doesn’t work!). Many speculators would have been burned while buy and hold investors rode the market down and back up again in April and May.
Furthermore, I think day trading is pretty stressful. If I’m sitting at my desk watching ASX share prices all day, I’d probably get pretty twitchy! In contrast, you can live relatively stress-free if you buy and hold a diverse portfolio of ASX shares. If you have spread your risk through a number of quality ASX shares or even a simple ETF like Vanguard Australian Shares Index ETF (ASX: VAS), you can, for the most part, sit back and relax.
Simply put, a buy and hold investment strategy works. If you hold your assets for less than 12 months, 100% of your gains are subject to capital gains tax (CGT). If you’re in the top tax bracket, this means you could lose 45% of your short-term trading gains.
On top of that, you pay brokerage every time you enter and exit a trade. This can quickly crush any gains you made in short-term buys like Afterpay or Nextdc Ltd (ASX: NXT).
However, investing for the long-term means your risk and returns are spread out. For me, I’d rather sleep peacefully at night with confidence in my buy and hold strategy than toss and turn over short-term ASX share bets in a volatile market.
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Ken Hall owns shares of Vanguard Australian Shares Index. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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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