Five essential lessons for ASX investors from the year gone by

The ASX is sliding again today. It looks to be shaping up for the third straight day of losses.

At the time of writing, the All Ordinaries Index (ASX: XAO) is down 0.8%. That brings the All Ords down more than 2.5% from the all-time highs it reached on Monday.

Now, these types of price swings are quite ordinary. But that won’t stop some investors from wondering if the market will keep falling and whether now could be the time to sell some shareholdings. At the same time, other investors are sure to ponder if this week’s retrace might not represent a good time to buy the dip.

Lacking a crystal ball, I can’t tell you which way the ASX will move over the coming days.

The best I, or anyone, can do is make an educated guess.

Which, according to Shane Oliver, head of investment strategy and chief economist at AMP Capital – is often a mistake.

Five essential lessons for ASX investors

Yesterday, I sat in on AMP Capital’s Webinar, where Oliver offered his analysis of the Federal Budget and provided an outlook for the ASX and global share markets.

One of the key takeaways was the 5 lessons investors should learn from the past COVID-focused year.

A question of timing

First, timing markets is hard.

As difficult as it is to call a near market high, it’s just as hard to call the near market low. Which means trying to time the markets correctly is largely a function of luck.

Oliver said:

You may have got out in January or February last year when markets were at record highs. Maybe you saw the pandemic coming. But the question is, did you get back in in March? And I reckon most investors [who sold out] didn’t. Then you end up getting in 6 or 12 months later when the market is very much higher.

Central banks rule, okay

The second essential lesson for ASX investors is: don’t fight the central banks.

You’ve likely heard the investor adage, “Don’t fight the Fed.” But following the outbreak of COVID-19, it wasn’t just the US Federal Reserve moving in to support markets. It’s been a concerted effort from the Fed, the Reserve Bank of Australia (RBA), the People’s Bank of China (PBoC), the European Central Bank (ECB), and more. Not a team you want to bet against.

No time for depression

Which brings us to Oliver’s third essential lesson ASX investors should take aboard from the past year: depressions can be avoided.

“Twelve months ago, everyone was talking about a depression. Not just a recession but a depression. And we avoided that,” Oliver said. He added that the government’s temporary support measures worked. Despite dire unemployment predictions, a lot of people didn’t lose their jobs thanks to measures like JobKeeper.

Though things still looked bleak on the ground on 23 March 2020, share markets look ahead. And hence the ASX surged from the 23 March lows, with the All Ords now up more than 49% since then.

Don’t overlook interest rates

Oliver’s fourth essential lesson for ASX investors is not to lose sight of the impact of record low interest rates.

You may have read some rather frightening figures on valuations on the ASX in terms of price to earnings (P/E) ratios. But it would help if you kept those in the context of the low rates.

According to Oliver, investment valuations need to be assessed relative to interest rates.

Even when you look at the forward P/E, in Australia we’re at 19-times, which sounds high, but you’ve got to allow that the yield you’re getting out of the share market is still much higher than the level of interest rates.

And that higher yield, he said, is what’s keeping money flowing into the ASX.

Noise-cancelling headphones, anyone?

Finally, Oliver’s fifth lesson for ASX investors is to turn down the noise.

“This is very important,” he said. “I reckon if you focus on the long-term rather than all the short-term noise, you’ll actually do reasonably well with your investments.”

Oliver pointed to the long-term trend of the value of the Aussie share market, which is strongly higher.

“The way to take advantage of that is to take a long-term strategy, make the most of compound interest… But don’t get thrown off by the cycle. In other words, try and turn down the noise.”

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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