The S&P/ASX 200 Index (ASX: XJO) has had an objectively awful few months. While the recent recovery might have shortened some memory spans, the fact means that the ASX 200 today is more than 5% below where it was at the start of August.
Earlier this month, that gap was at an even wider 7.5%, but the 2.6% recovery the ASX has embarked upon since the start of the month has narrowed the gap.
Now although we are not quite in market correction or crash territory, we have undoubtedly seen a bit of a downturn in the Australian share market since August.
Downturns can be scary events. But at the end of the day, we investors have three options when a downturn does come our way.
We can buy more ASX shares for cheaper prices.
We can sell our shares and switch to cash.
Or we can do nothing.
I tend to think of these three options as akin to a traffic light. There's a green path that can help you set your ASX share portfolio up for lucrative gains and investing success. The orange path won't really help you, but it won't hurt you either. But if you choose wrong and go red, it can cause immense damage to your wealth.
Red, green or orange: When to buy ASX shares
If you guessed the orange path was doing nothing, then full marks. But it's the red path – selling out of your shares and going to cash – that can really throw a spanner in your financial works.
Making emotional decisions for your investment portfolio is never a good idea. But it's those decisions that are driven by fear, fear of losing even more money, that can really play havoc with your wealth.
For one, you somehow have to pick the bottom (or close to it) of the downturn for the perfect time to sell. Then, you also have to buy back in at the exact time that the markets turn and start to go back up. If you somehow manage to nail both of these narrow windows, go and buy yourself a lottery ticket as well.
Here's how financial planner Rex Whitford of Wealth for Life put it in a recent report in The Australian:
Don't go to cash – this trying to time the market is insane… The market will recover, unless there's an Earth-crossing asteroid. If you have money you don't need for a while and are prepared to ride it out, go ahead and buy – the market is on sale.
AMP chief economist Shane Oliver added the following:
People tend to sell after a fall, and generally it's hard to get back in… These things can be very fast-moving. It's normal for the market to experience this sort of volatility – 10 per cent falls are regular occurrences, and it's the price you pay for that higher return from shares.
So I've been buying some shares in the past couple of months, thanks to these 'sale' share prices we've been offered by the markets. I think most ASX investors should also look to top up the holdings of their favourite companies during times like these as well.
You only really lose if you sell quality assets, so make sure you're picking the green or orange paths in a downturn, and avoiding the red path's siren song at all costs.