‘No risk, no reward’: Exit ASX shares if you can’t stomach volatility, says experts

This year has been a hell of a ride for stock investors. Here’s the reward for holding on while your stomach turns.
The post ‘No risk, no reward’: Exit ASX shares if you can’t stomach volatility, says experts appeared first on The Motley Fool Australia. –

There is no doubt 2022 has been a wild ride for investors dabbling in ASX shares.

January saw a deep plunge due to fears about persistent inflation and rising interest rates. Russian tanks rolled into Ukraine in February.

The S&P/ASX 200 Index (ASX: XJO) then made a massive 6.4% gain in March.

And this month, it consolidated those gains, only to fall off a cliff in the final week.

That’s sufficient volatility to turn your hair grey.

Yes, it is stressful seeing your portfolio turn into a sea of red, regain some of those losses, then lose them all again.

But a couple of fund managers reminded investors to stay focused on the long game.

“One-year returns for equity markets can be incredibly volatile. Regular calendar year falls of -10% to -30% are relatively frequent,” said Ophir Funds co-founders Steven Ng and Andrew Mitchell.

“However, as we go out to holding periods of five years, falls become MUCH less frequent. At 10 year periods, they have become practically non-existent and there are no periods of negative 20-year returns.”

‘Transferring money from the impatient to the patient’

Ng and Mitchell mentioned a famous Warren Buffet quote to demonstrate their point: 

“The share market is a device for transferring money from the impatient to the patient.”

The simple fact is that investors need to tolerate short-term price fluctuations as the entry fee for playing.

“Volatility and drawdowns are the price you pay for higher returns from shares over the long term,” their memo to clients read.

“You genuinely can’t have the sweet without the sour.”

What’s the payoff for putting up with “occasional -50% share market falls and more frequent -20% bear markets“?

Ng and Mitchell took the example of $100 invested in 1899 through cash, bonds, or shares.

Cash would have turned that into $8,650 today, while bonds would have done far better, with a current balance of $24,556.

“However, in another galaxy is equities, at $9,994,326!” the duo said.

“Hard to believe but true — more than 400 times the dollar return of bonds over the last 122 years. The shorter-term risk of shares has been handsomely rewarded over the long term.”

Ng and Mitchell were reminded of another quote, this time from Buffett’s right-hand man Charlie Munger:

“If you can’t stomach 50% declines in your investment, you will get the mediocre returns you deserve.”

Setting expectations about timing and risk management

Mitchell and Ng said there’s nothing wrong with putting in risk management practices to reduce the bleeding during volatile times like 2022.

“But expectations must be realistic about what these practices can achieve – they are not a cure-all for avoiding declines in value when markets fall.”

They acknowledged that, for both professionals and amateurs, corrections are unpleasant.

“It is always painful whilst you are going through it, but ultimately it is a necessary ingredient for shares to outperform over the long term and for active managers, such as ourselves, to be able to stand the chance of beating the markets over time.”

And don’t forget, timing the market is a mug’s game.

“We’d all love to be able to time markets and miss these falls, but history (and the data!) suggests this is likely to be nigh on impossible,” read Ng and Mitchell’s memo.

“It is BECAUSE investors have to go through the painstaking drawdowns of the share market that they tend to be handsomely rewarded over the long term.”

The post ‘No risk, no reward’: Exit ASX shares if you can’t stomach volatility, says experts appeared first on The Motley Fool Australia.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

More reading

5 things to watch on the ASX 200 on Thursday

Here are the top 10 ASX shares today

These ASX 200 shares are up more than 10% in the last month

ASX 200 shares trim losses despite surging inflation news

Here are the 3 most heavily traded ASX 200 shares on Wednesday

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. 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.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

  • This field is for validation purposes and should be left unchanged.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US & HK* Trades. Click Here!