Are you ready for the ASX to fall?

Unless something unusual happens, the ASX is likely to open — and end — in the red today.

As I write this, ASX futures are down 1.1%.

The culprit: our US cousins, who saw their markets fall sharply at the end of last week.

Last Friday, US time, the Dow Jones industrial average of 30 of the largest US stocks fell 2.5%. The broader S&P 500 lost 2.1%. And the tech-dominated NASDAQ composite fell 2%.

In sum, it wasn’t pretty.

Maybe we shrug off the US lead. Maybe we march in lockstep. But in any event, it’s worth thinking about volatility and market falls, and preparing ourselves for both.

Because, in recent times at least, it’s very unusual.

Some context: Before the falls, the American markets were up somewhere around 30% over the past 12 months. Volatility has been unusually low. In short, almost everyone has been optimistic. A relatively placid — and rising — sharemarket has been the result.

And that’s incredibly rare.

wrote a column in the Fairfax press in August of last year. And while it’s considered bad form to quote oneself, I’m doing it here because at times like these it’s easy for Johnny-come-latelies to tell everyone — after the fact — that they saw it coming.

I’m also quoting myself because I want you to know that the return of volatility — and the occasional uncomfortable sharemarket fall — was both inevitable, and nothing to fear.

My article was titled Investors: It’s about to get bumpy. Here’s part of what I wrote:

“…what’s surprising isn’t that volatility – and investor fear – has increased. It’s that both were so incredibly low to begin with.”


“And here’s why [a lack of volatility is] dangerous. Over the long term, volatility is barely an irritant. Yes, it can be stomach-churning to watch your shares go from $3 to $7, then to $2 and $5 on the way to $10. A gentle upward sloping journey from $3 to $10 with no bumps would be preferable for most of us.

“But what’s worse is when you forget volatility like that happens. When you’ve enjoyed relative calm seas and a slowly rising market for so long, that volatility becomes a bad dream. When, to your detriment, you are lulled into a false sense of security.”

Sound familiar?

The headline writers will be warming up the regular “$X billion wiped off the ASX” article-toppers as you read this.

I ended my article with:

“The solution? Face the fear now. Imagine how you’ll feel when that time comes. And resolve not to give in to it. Because this is the calm before the storm.”

The problem, of course, is that we can’t know whether this is the beginning of a storm, or a temper tantrum that’ll pass, perhaps as early as tonight.

And be careful of the “I told you so” brigade. They’ve probably been telling you ‘so’ since the GFC… while the market regained and surpassed the 2007 highs, including dividends.

They were probably telling you ‘so’ as the US market put on 30% over the last 12 months.

If we’d listened to them, we’d be materially worse off. Did they tell you that? I didn’t think so.

Here’s where human nature is awfully cruel: each “here comes the crash” article or forecast or snarky tweet feels smart. Or at the very least has a kernel of truth which is enough to make us think twice.

The ‘experts’ who called for a double-dip recession in 2009 in the wake of the GFC? It was possible.

The guys who told us China would crash in 2011? Some of the smartest minds could conceive of it happening.

The people who said housing would crash in 2014? No-one thinks Aussie house prices are cheap, but they kept rising for another three years.

Brexit was going to precipitate an economic slump. Donald Trump was going to be awful for the global economy. And remember Grexit, when Greece was going to leave the EU and all hell was going to break loose? It was all anyone wanted to talk about.

Now, here’s the thing: I didn’t say — or know — at the time that those fears would be non-events.

The point isn’t that I had some magical crystal ball, but rather that, as the old saw holds, ‘Economists have predicted 9 of the last 2 recessions’. That’s a little unfair to economists, of course, but it applies equally to the ‘doom and gloom’ brigade.

But let’s make it more real: if you’d sold everything at any of those points, you’d missed out on very significant subsequent returns.

And let me jump inside some of your heads for a minute. Some of you — right now — are thinking: “Yes, yes… but now, NOW, this is real. I wasn’t worried then, either, but I am now. And there are real reasons this time…”

I’m going to put it gently, here: you probably said that last time, too.

“Yeah, okay… but this time we have high share prices… high house prices… the economy is weak…”

That was true 3 of 4 years ago, too. Back when we were worried that the mining bust would sweep all before it.

But let me take the other side of this, too. What if this is, dinkum, the start of a bear market? Shouldn’t we do something, now?

That’s easy. Yes, we should.

Just show me your crystal ball, with the details of how far shares will fall, and when the falls will be over. Because mine is broken.

You see, that’s the uncomfortable truth of investing. Even if some of us have forgotten what it feels like, we’ll have lots more volatility in the months, years and decades ahead. We’ll go through more ‘corrections’ (I hate that term: why do markets only ‘correct’ down, but not up?) and bear markets.

How do I know? Because that’s been the story of share markets for more than a century.

And you know what else history tells us?

That despite the semi-regular market downturns, and the far-more-regular prognostications of doom, share markets tend to grow, strongly, on average and over time.

If we could tell, in advance, how markets would move, we’d be mugs not to sell in advance of downturns, and buy ahead of booms.

But, unfortunately, we can’t know the start dates, duration or size of those swings. So we do the next best thing: we put the odds in our favour.

By buying quality companies with strong businesses and attractive futures.

By paying good prices.

By remembering that markets tend to rise, on average, over time.

By copping volatility on the chin, not because we like it, but because we know it’s inevitable.

By investing regularly, adding cash frequently and taking advantage of dollar-cost-averaging.

In short, by doing what has worked, and continues to work.

I don’t blame anyone who is looking at today’s market with trepidation. It’s never fun imagining losses — and even less fun when that turns to reality.

It’s natural to want to avoid both the emotional and financial pain of loss.

And the easiest advice to give would be to tell you to sell, just in case things get worse. But that’s about the worst advice you can give someone.

It’s good for a financial adviser’s career: you simply remind people that you took a prudent approach and avoided the chance of loss.

But it has almost always been terrible for the client. Because that adviser has also robbed them of the chance of gain. And again, remember that gains are the norm, and that historically speaking, gains have well and truly dwarfed losses, particularly on a compound basis.

I don’t know what’s coming next. Maybe this is the storm before the calm. Maybe there’s more choppy waters to navigate in the days and weeks ahead. Maybe today’s falls — if they come — are an isolated incident, and we’ll be back to partying by the end of the week.

But what I can tell you is that for my personal portfolio, and for the investment services here at The Motley Fool, there’ll be no change.

Speaking personally, I’ve become almost immune to market falls. Not immune from the financial impacts, but immune from the emotional impact. For three reasons:

1. I have a good memory. I’ve seen it happen before. It’s scary at the time, but looks far less impactful in the rear vision mirror;

2.  I know that — as long as you invested well and avoided leverage — your portfolio has little to fear over the long run; and

3. If I just keep investing regularly anyway, I’ll get to enjoy the benefit of buying at lower prices.

So, here at The Motley Fool. we’ll pay no heed to the gyrations of the market or the prognostications of the tea-leaf readers.

We’ll just buy when we see long-term value. We’ll sell when we no longer believe one of our recommendations is going to live up to our expectations.

Indeed, if share prices do fall, our members are more than likely to see our services get excited about the buying opportunities, rather than scared of the falls.

We take to heart Warren Buffett’s exhortation: “Be greedy when others are fearful, and fearful when others are greedy”.

And for those of you who are members, please remember we’ll continue to share the ride with you. These are the times I hope you’ll get the most value from the articles we write for you — both in the past, and in the weeks ahead. And that’s on top of our recommendations, which we’ll continue to bring to you.

If you’re not a member, now might be a good time to consider joining. Having a trusted friend by your side when you’re tempted to panic can be very prudent.

Remember, fellow Fool, it’s the past year of low volatility that is abnormal.

Normal, in the share market, is lots of ups and downs. Plenty of uncertainty. Predictions of doom.

And long term wealth creation, despite all of that.

So stay the course. Buy regularly. Expect volatility. Invest anyway.

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