Yesterday, the S&P/ASX 200 (INDEXASX: XJO) as well as markets around the world were tumbling on fears that Iran and the US were spiralling into a fresh armed conflict in the Middle East.
Today, with those fears abating, markets are once again pushing through to new all-time highs.
It’s enough to give anyone watching closely a severe case of whiplash.
But I think there’s a lesson in all of this that anyone who is looking to build their investing skills.
The dangers of short-term thinking
Say if you were more of a ‘trader’ than an ‘investor’. Traders (generally speaking) hope to play short-term fluctuations in asset prices and make a profit from those moves – maybe making 5 to 10 trades in a single day in some cases (maybe more).
So yesterday morning, the news came out that Iran had retaliated against the US and launched missiles at US military bases in Iraq.
A trader would have noted this and immediately sold out of shares and bought into ‘safe haven’ assets like gold and government bonds – safe in the knowledge that armies of like-minded investors would have done the same.
We saw the price of gold spike yesterday from around US$1,570 to above US$1,600 an ounce – so maybe our trader timed everything well and managed a 1.5% gain from this move.
Then, we had news last night that the US wouldn’t really be retaliating in a military sense and would instead be using economic sanctions against Iran in response.
Knowing this, our trader would have sold gold (or bonds) and immediately got back into the share market. Again, if they had timed this perfectly, they would have maybe eked out another 1.1% gain.
But here’s the problem. Our trader would have banked at least 2 sets of capital gains (which are normally taxable) as well as whatever transaction costs (brokerage for example) would have been associated with their 4 moves.
I wouldn’t be surprised if after all those costs, our trader wouldn’t have really come out on top unless they were playing with a very large pile of cash. And that assumes their market timing was impeccable (highly unlikely).
Meanwhile, any ‘investors’ who just sat on their hands and let things unfold – safe in the knowledge they are investing through ups and downs – would have no extra costs and a nice tidy set of gains in their portfolios today.
For short-term traders, aside from all the stresses of constantly trying to get your trades perfectly timed, there are also massive costs for dipping in and out of markets in a frequent manner.
In my opinion, buying and holding for the long term is by far the best (and least stressful) way to make money in the stock market. I know which one I prefer!
The post What the Iran situation really tells us about ASX investing appeared first on Motley Fool Australia.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020