The ASX share market goes through volatility sometimes. Ups and downs are common although, like a rollercoaster, it can feel uncomfortable to live through.
It can be very unsettling to see the value of one's portfolio drop heavily in a relatively short time.
There's a saying about the share market: It goes up like a staircase and falls like an elevator.
How can investors stay calm and carefree during these volatile times or the next crash? I think there are a few things to keep in mind.
Have an emergency fund
Emergencies are unexpected. We don't know when they're going to hit.
In a financial emergency, someone may need enough money to buy a new fridge, replace a written-off car, or even have enough cash to live off for months in case of job loss.
Regardless of investing, I do think it's a good idea for every adult Aussie to have an emergency fund large enough to protect them from the worst (realistic) financial problem. For a family, that could be the main breadwinner losing their income, so having between three to six months of living expenses saved up could be a good move.
I also think having an emergency fund is a good idea so that investors don't have to sell their ASX shares at precisely the wrong time to raise cash. Selling shares during a downturn – when share prices are down – wouldn't be ideal.
Bad news sells
Newspapers (and their websites) want to try to generate as much reader intrigue as possible.
Having a title like "ASX share market loses $50 billion in one day" can certainly stir up emotions, and make us want to read about it so that we feel more 'informed'.
I think it's human nature to want to try to protect ourselves from harm. However, we're not being chased by a lion. Instead, it's just the stock market going through volatility. Personally, I think it's better to avoid reading scaremongering news so that we can focus on the long term and steer clear of making fear-based decisions (such as selling shares, or not investing) during these times.
Invest in resilient businesses
Sometimes a downturn will be painful for a company, perhaps bad enough to force that business to close down.
I try to avoid businesses that have questionable business models, are dangerously indebted on their balance sheets, or are loss-making with no possibility of profit in sight.
Picking businesses that could display good resilience during a downturn allows us to sleep better at night and ensures there are no casualties in our portfolios.
There are a good number of candidates that could be called resilient. As examples, I'll name businesses like Coles Group Ltd (ASX: COL), Woolworths Group Ltd (ASX: WOW), and Telstra Corporation Ltd (ASX: TLS) as blue chips that could continue to see solid demand during a downturn.
See it as an opportunity
As an investor, I would like to invest in the ASX shares I pick at the lowest possible price.
I think that recessions and market downturns can present the best time to buy shares.
While Australia isn't in recession, there is plenty of investor pessimism with a number of sectors seeing declines, such as ASX retail shares. For example, in 2022 to date, the Wesfarmers Ltd (ASX: WES) share price is down 26% while the JB Hi-Fi Limited (ASX: JBH) share price is down 16%.
When share prices fall, I think investors should try to see it as an opportunity. Legendary investor Warren Buffett once said the following about share market declines:
To refer to a personal taste of mine, I'm going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the 'Hallelujah Chorus' in the Buffett household. When hamburgers go up in price, we weep. For most people, it's the same with everything in life they will be buying — except stocks. When stocks go down and you can get more for your money, people don't like them anymore.
Remember history
It's worth remembering past performance is not a guarantee of how future performance will go.
But, I think it's useful to remember that the (ASX) share market has gone through plenty of volatility before. The COVID-19 crash in early 2020 and the GFC were two of the latest heavy declines.
The pain we've seen in 2022 is just the latest in a long list of difficult times for investors. But the share market has typically recovered in the past, eventually. Of course, it could take months or years.
While the past may suggest that recovery eventually happens, we don't know how long it will take or what will drive it. This may not help in the short term, but I think it can give investors some strength to hold on for the potential recovery.
