The S&P/ASX 200 Index (ASX: XJO) is continuing to exhibit elevated volatility as ASX shares whipsaw upwards following yesterday's steep fall.
Perhaps investors are attempting to call the bottom of the market a day after it officially entered correction territory. Conversely, it could be a temporary rally before the next leg downwards. Ultimately, only time will tell which is true.
Though, it raises the question: Is it possible to identify when ASX shares are hitting the bottom, prompting the time to invest? And, if not, what is the alternative for investors?
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Can we time the market?
There are few things more difficult in investing than watching your ASX shares diminish in value shortly after buying more. It pushes all of our emotional buttons — which is why some wait on the sidelines, waiting for a cue that the pain is over.
Only after the bottom has been reached would these investors choose to invest more money in ASX shares. In the process, avoiding all the downside and capturing all the upside.
It sounds wonderous in theory — but is this approach realistic in practice? To answer this question — and others — we spoke to The Motley Fool's chief investment officer, Scott Phillips.
The Motley Fool: Are there any signs that investors can look for in spotting a bottoming in the market?
Scott Phillips: Unfortunately not. See, if we could know that, then it'd never happen, because others would know it, too. (If you want a real-life example, the 'Santa Claus rally' — where stocks rise in December — happened in all likelihood because investors and traders tried to get in ahead of the old 'January effect'.
Once you can reliably foresee an event, that knowledge makes the event unlikely to happen. Another example is the Reserve Bank dropping interest rates to stop a recession.
The Motley Fool: Is the exercise of 'timing the market' practical?
Scott Phillips: Timing the market is, frankly, dumb. Maybe some people can do it. Or maybe they were just lucky. Some very, very smart people who sold early in 2020, to avoid losses, missed the COVID rally entirely and ended up going backward as a result. It's tempting to try. But probably a waste of time, and it might end up giving you a worse result.
What's the alternative for buying ASX shares?
While timing the market may not be realistic, there is a different approach that has been successfully put to work in the past. This approach requires a long-term mindset, but it has produced incredible returns for investors before.
Rather than attempting to predict the future, investors have the option to buy and hold ASX shares. This approach emphasises the duration of the investment, instead of when you invested.
Phillips describes this 'time in the market' approach by saying:
If it was possible to time the market, everyone would do it. But do you know any seriously rich market timers? You've probably heard of Warren Buffett, though. His returns are astronomically good, over more than half a century. Or, the market itself, that took a hypothetical $10,000 and turned it into $160,000 over 30 years, according to Vanguard. How? By putting it into the market, once, in 1991. And then? Nothing. Literally nothing. Just waiting. That's 150,000 good reasons to eschew market timing, I think.
