After watching the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) rise in each of the last six weeks, it's clear as day that the rally will soon come to an end.
I don't mean to be the bearer of bad news, but that's just the way share markets work. They rise and fall on a daily basis, never going up in a straight line.
Already there are signs that this week could mark the ASX 200's first week in the red in nearly two months. The market has fallen in each of its sessions so far this week, losing a little over 1%, although there are also indications that it could be in for a better session today.
Clearly, the ideal situation for investors is that they buy at the bottom of the market and sell at the top. So, knowing that this mini-rally must soon come to an end, some investors are probably considering selling their shares and waiting for them to fall again before repurchasing.
There are a number of reasons why that would be a mistake:
- Taxes: By selling your shares to lock in a short-term gain, you are also creating yourself a capital gain (assuming they have risen in price) which will need to be declared to the taxman.
- Brokerage: In addition to the capital gains tax, you'll also incur a brokerage fee for selling your shares, and then another fee if or when you decide to buy them again.
- Many investors don't return: Of course, saying you'll buy your shares back when the market falls again is one thing, but actually doing it is another. Chances are, if you sell some of your shares now, you won't repurchase them while you'll also miss out on any gains if the market does keep rising.
There's also the fact that, even though the market itself will no doubt experience a pullback at some point soon, it won't necessarily be a major pullback. Heck, it could fall for a week and then embark on another 10-week rally for all we know.
Indeed, it's impossible to tell what the market will do in the short-run. But history has shown that, over time, the market will move in a north-easterly direction, whereby the best companies rise in price and the mediocre fall.
By holding onto your shares through any expected or unexpected volatility, you can delay the recognition of any capital gains for tax purposes, whilst also minimising your brokerage fees.
Doing so would also force you to focus more on the fundamentals of the businesses you're investing in, rather than paying too much attention to the day-to-day movements of a three-letter ticker symbol.
What shares should you buy?
Of course, that doesn't mean you should go out and buy just any old business, nor does it mean you should stop re-evaluating the shares that make up your portfolio, from time to time.
For instance, if your wealth is evenly spread between Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) you should certainly consider the risks of being so overweight on the banks.
In saying that, however, there is reason to be more bullish on shares offering solid dividend yields. The Reserve Bank of Australia is expected to cut interest rates even further in the coming months, which could make shares offering high yields all the more appealing to other investors.
Telstra Corporation Ltd (ASX: TLS) is an example of a business you could consider, together with shopping centre giant Scentre Group Ltd (ASX: SCG).
Either way, the lesson for investors is to not focus on the short-term nature of the share market. Focus instead on businesses that you believe will be much larger in five or ten years' time, and make a commitment to yourself to hold them for the longer run.
