I believe investing in ASX stocks is one of the best things we can do for our finances over the long term. But, just like buying anything, we need to pay a price for the assets we buy.
Many questions arise when considering the price to buy a stock at. Is today's price a good one? Does it even matter? Thus, let's discuss whether it matters what value we buy ASX stocks at.
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The purchase price is a key part of returns
Making a positive return is the most important thing with investing, otherwise we may as well just have kept the money in a bank account. Of course, we can't know which investments are going to do well, and volatility is likely to appear every so often.
If we bought an ASX stock a year ago at a share price of $10 and it's now $11, that's a return of 10%. But if we bought at $12 and it was now $11, that'd be a decline of close to 8%. It's the same ending price but produces quite different returns.
The returns can seem even more dramatic if we buy at times when the share market plunges. Imagine we'd invested in that business if it had sunk to $6 (perhaps in 2022) – getting back to $11 would translate into a return of 83%.
That's also why investors need to be careful about paying extremely high prices for a business because it reduces the likelihood of making a good return.
So, in terms of ASX stock returns, the price does matter.
This reminds me of a particular saying – price is what you pay, value is what you get.
Don't try to time the market?
There are plenty of good reasons why investors don't need to try to pick the best price. For starters, we don't know what prices are going to do. If we knew what prices were going to do, investing would be so easy! There's no need to stress too much about it.
Plus, even if prices do go lower, we don't know if that's the bottom or not. I'd rather make sure I invest at a good price than try to wait for an even better price. I'd rather not miss out on a bargain!
With diversified investments like an exchange-traded fund (ETF), I think we can be less price-specific because there are so many underlying businesses with different valuations. For example, I'd happily invest in the Vanguard MSCI Index International Shares ETF (ASX: VGS) on a monthly basis, without trying to pick and choose which days to buy. As new winners emerge, they can help push up the unit price of an ETF.
Over the long-term, if we invest in the right ASX stocks (at a reasonable price), it shouldn't matter too much if we buy at last month's price or next month's price – over the years, they should be able to deliver good performance. But, it's impossible to know what's going to happen without a crystal ball.
