It's a scary time to be an investor in ASX shares at the moment.
It was volatile enough already this year with inflation and interest fears, a war in Ukraine, and new COVID-19 lockdowns in China.
But now as fears turn into the reality of actual interest rate rises, there is a degree of panic among ASX share investors.
Since 21 April, the S&P/ASX 200 Index (ASX: XJO) has lost 7.5%.
"It is often said markets take the stairs up but the elevator down and that was definitely the case in April," said Ophir Asset Management co-founders Steven Ng and Andrew Mitchell in a letter to clients.
It's not easy seeing your portfolio turn into a sea of red.
But almost every long-term fund manager will remind you that these are the times to be mentally tough and stay the course. Don't give up.
Ng and Mitchell were telling their clients exactly this in their letter this week, in a poetic way:
If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
…
If you can meet with triumph and disaster
And treat those two impostors just the same;
If—, by Rudyard Kipling
Ng and Mitchell said Kipling's words reminded everyone that investing is as much about controlling your emotions as it is about buy and sell prices.
"Investors often dramatically underestimate the value of 'keeping your head when all about you are losing theirs'."
They recognised that in times of market turmoil, human instinct is to get off the scary rollercoaster to stand on the safety of firm land.
But selling out when markets are plunging is a recipe for disaster in the long run.
"Equities tend to outperform over the long term," Ng and Mitchell said.
"So if the underlying investment thesis remains intact, and the stock's fundamentals have not deteriorated, or the manager's process is working but their style is simply out of favour, selling at the bottom and buying at the top will rarely be profitable."
When you stay the course for the long term, temporary "macroeconomic" events like inflation, rising interest rates, wars, and supply chain constraints become just small bumps in the road.
"Virtually all that matters in the long term is the ability of the companies to grow earnings through time," their memo read.
"Here it's all about things like unique products or services, customers' willingness to pay, addressable markets, and intensity of competition."
In other words, they are all factors that the business can control.
Portfolio adjustments the Ophir team has made
One part of Kipling's poem is "make allowance for their doubting too".
As such, while practising patience and not selling out at the bottom, investors must always review their portfolio for improvements.
While emphasising that their portfolio remains largely intact and that this is not a "wholesale" change in strategy, Ng and Mitchell's team has made some minor adjustments.
- Decreasing consumer discretionary exposure
- Increasing defensive growth exposure
- Moving up the average market capitalisation of its holdings
They feel shifting away from consumer discretionary ASX shares is a wise idea in light of rising interest rates and less consumer interest.
Defensive growth shares, which are businesses "trading at reasonable prices" and are less dependent on economic expansion for their own growth, could better withstand a downturn.
And reducing exposure to its least liquid holdings is a defensive move before any economic slowdown.
There is one advantage to investors in a slowing economy, according to Mitchell and Ng.
"The bright side of slower economic and earnings growth, if that eventuates, is that those businesses that can structurally grow their earnings will become a scarcer commodity again," read their memo.
"What becomes scarce typically becomes valued by the market, and gets bid up."
