Many investors in ASX shares think you have to time the market to build wealth. That’s simply not the case, and in fact, I believe market timing could cause your portfolio more harm than good.
Here’s why the tried and tested ‘buy and hold’ strategy can often work out best in the long run.
Why you don’t have to time the market to get rich
The February/March bear market was the perfect illustration of why trying to time the market can be so dangerous.
As ASX shares plummeted, many investors panicked and sold their positions. This would trigger a capital gains event (assuming you had picked some winners), meaning there’s tax implications, as well as the requirement to pay brokerage.
Let’s say your average investor didn’t sell on the first day of the market falling, which was around 20 February. Instead, they might have waited until the S&P/ASX 200 Index (ASX: XJO) had fallen 25.9% by mid-March.
And if they were the type of flighty investor that was willing to sell at the first sign of trouble, they may have also had a particularly bearish outlook on ASX shares for the remainder of 2020. This means they probably would have waited for a strong upward trend before buying back into the market.
Let’s say they waited until the ASX 200 benchmark was up 20.7% from its 23 March lows on 14 April before buying back in.
That investor would be in a very similar position to what they would’ve been in had they held their investment over the entire period. Only they would have paid brokerage twice and taxes on their gains.
Trying to time the market is honestly a mug’s game. If you’re a serious investor, I believe it’s best to purchase high-quality companies and hold them for the long term.
Which ASX shares should I be buying?
Which ASX shares to buy is the next question. Rather than day trading, which is essentially gambling with your money, remember that you’re investing in actual companies.
The shares you end up buying will depend on your investment goals and current portfolio construction. I personally like the look of a couple of blue-chips in the current market.
BHP Group Ltd (ASX: BHP), for example, could be a strong buy ahead of a potential infrastructure boom. Alternatively, picking up Woolworths Group Ltd (ASX: WOW) on the back of its strong turnover figures could be a consideration.
Whatever your strategy, trying to time the market should not be a big part of it. Keep your eye on the prize and with a touch of luck you could build a sizeable portfolio over time.