ASX shares can help millennials retire before their parents.

There are a lot of people out there that have not been building up their retirement nest enough to be able to retire comfortably at 65, perhaps not even by 70.

I don’t know every family tree out there. If you’re a millennial who has parents who are about to retire in 2021 I’m not sure I can help. But the younger millennials – those born in the mid 1990s – have the potential to beat their parents to retirement if they work hard at it. I think ASX shares are key.

Why are ASX shares the answer?

I believe that most asset classes offer very little potential for long-term wealth growth. Cash and bonds offer very little return due to the RBA’s ultra low interest rate.

I think capital city property could be permanently changed by the coronavirus crisis. More people may decide to rent than buy with cheaper rental prices (lowering demand for property buying). Immigration could be low for a long time. Interest rates can’t really go any lower. People may want to avoid big cities and live in small regional areas.

ASX shares on the other hand are great for millennials to invest in. The purchase costs are very low (think how expensive stamp duty and other buying fees are). You can start with as little as $500, whereas you need a huge cash deposit for a property. Most of those property return calculations don’t include the costs of purchasing. Think of other costs of negative gearing, the loss of money when the property is vacant and so on. These usually aren’t included either.

Plenty of millennial parents may be invested in the wrong assets at the moment.

Which investments would be good ideas?

Not every ASX share investment is a good idea. Expensive and poor performing investment managers are drains on your potential wealth. Plenty of people just own mature, low-growth businesses like Commonwealth Bank of Australia (ASX: CBA), Telstra Corporation Ltd (ASX: TLS) and Woolworths Group Ltd (ASX: WOW). These probably won’t do much over the 2020s. 

It’s growth that will make the biggest difference. Individual ASX shares like A2 Milk Company Ltd (ASX: A2M), Pushpay Holdings Ltd (ASX: PPH), Brickworks Limited (ASX: BKW), Bubs Australia Ltd (ASX: BUB) and Altium Limited (ASX: ALU) are names that I think could be much bigger businesses in five years.

There are some listed fund managers that I think have a very good strategy. Does their style mean they’re likely to produce strong returns over the long-term? Some ideas are: WAM Microcap Limited (ASX: WMI), MFF Capital Investments Ltd (ASX: MFF), Magellan Global Trust (ASX: MGG) and PM Capital Global Opportunities Fund Ltd (ASX: PGF).

Many millennials find the easiest way to invest in shares on the ASX is in low cost exchange-traded funds (ETFs). Some examples are: BetaShares Australia 200 ETF (ASX: A200), iShares S&P 500 ETF (ASX: IVV) and Vanguard MSCI Index International Shares ETF (ASX: VGS).

How fast could a millennial retire?

I’m not sure how much your finances would be able to invest. But let’s say you make it a big goal in you’re life and you’re able to achieve returns of 10% a month with ASX shares. According to Moneysmart if you were aiming for $1 million in 20 years (to beat your parents) you’d have to invest around $1,325 a month. Obviously if you invested more, or made better returns, then you could return quicker.

I think that’s entirely possible for two-adult household who diligently saved and invested each month.

More reading

• Should you invest in ASX shares for income?
• 2 ASX shares for a first-time investor
• Are these China-exposed ASX shares in danger in 2020?
• If you invested $10,000 in the Altium IPO, this is how much you’d have now
• 2 ASX 50 shares to buy for your retirement portfolio

Tristan Harrison owns shares of Altium, Magellan Flagship Fund Ltd, MAGLOBTRST UNITS, PM Capital Global Opportunities Fund Ltd, and WAM MICRO FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of BUBS AUST FPO. The Motley Fool Australia owns shares of and has recommended Brickworks, PUSHPAY FPO NZX, and Telstra Limited. The Motley Fool Australia owns shares of A2 Milk and Altium. The Motley Fool Australia has recommended BUBS AUST FPO and Vanguard MSCI Index International Shares ETF. 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.

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It’s easy to lose sight of the buy and hold investment strategy when markets are volatile. In the March bear market, everyone felt like they were Warren Buffett. Never mind the fact they may have been relatively indifferent investors in February, right throughout 2019 or in the years prior.

All of a sudden passive investors became active. Everyone was looking for bargains, but did it really pay off?

Why a buy and hold investment strategy is best

Let’s be clear: day trading is just gambling on ASX shares. If you buy Afterpay Ltd (ASX: APT) shares and hold them for a day or two, you may see some gains. However, I think a lot of those gains would be lost to transaction fees and taxes. 

In contrast, a buy and hold investment strategy makes sense. You’re not just buying ASX shares, you’re investing in high-quality companies for the long-term. That means understanding the companies you own and believing in their long-term success. The CSL Limited (ASX: CSL) share price could go up or down this week, but I believe it will go up over time.

A recent article in the Australian Financial Review (AFR) highlighted this increase in active investing resulting from COVID-19. The article references ASIC data from February and March indicating an increase in the level of retail investors’ trading. Everyone was ducking in and out of ASX shares like Webjet Limited (ASX: WEB) as valuations soared and crashed. But this represents a form of market timing (which doesn’t work!). Many speculators would have been burned while buy and hold investors rode the market down and back up again in April and May.

Furthermore, I think day trading is pretty stressful. If I’m sitting at my desk watching ASX share prices all day, I’d probably get pretty twitchy! In contrast, you can live relatively stress-free if you buy and hold a diverse portfolio of ASX shares. If you have spread your risk through a number of quality ASX shares or even a simple ETF like Vanguard Australian Shares Index ETF (ASX: VAS), you can, for the most part, sit back and relax.

Foolish takeaway

Simply put, a buy and hold investment strategy works. If you hold your assets for less than 12 months, 100% of your gains are subject to capital gains tax (CGT). If you’re in the top tax bracket, this means you could lose 45% of your short-term trading gains.

On top of that, you pay brokerage every time you enter and exit a trade. This can quickly crush any gains you made in short-term buys like Afterpay or Nextdc Ltd (ASX: NXT).

However, investing for the long-term means your risk and returns are spread out. For me, I’d rather sleep peacefully at night with confidence in my buy and hold strategy than toss and turn over short-term ASX share bets in a volatile market.

More reading

• Should you invest in super or your ASX share portfolio?
• Are these China-exposed ASX shares in danger in 2020?
• Brokers name 3 ASX 200 shares to buy today
• Why Qantas, Webjet and these ASX travel shares are dropping lower today
• ASX 200 up 0.8%: Big four banks push higher but Xero tumbles lower

Ken Hall owns shares of Vanguard Australian Shares Index. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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 post Why a buy and hold strategy for ASX shares is best appeared first on Motley Fool Australia.

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