Why are investors so frightened of buying ASX shares right now?

Buy stocks when they're at a huge discount, say the experts. But it's easier said than done, right?

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A worried man chews his fingers, indicating a share price crash or drop on the ASX 200

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Regular readers would be familiar with the advice: buy shares for cheap when the market is down.

Well, the S&P/ASX 200 Index (ASX: XJO) is 5% down in 2022. So investors should be out there madly snapping up bargains like they're at the Boxing Day sales, right?

In reality, this is not happening.

"The conversations I'm having with many clients at the moment [are] they are sitting on the sidelines or unwilling to invest more capital due to market uncertainty," Nucleus Wealth senior financial adviser Sam Kerr said on a blog post.

"The number one cause is fear. Fear of the future, fear of the unknown and fear of a downturn."

This fear is natural, according to Kerr. One just needs to take a deep breath and look at the cold hard facts.

"This uncertainty is just human psychology playing out, and often it is irrational when looking at the positive drivers for business and property over the long term."

Was there no uncertainty in the past?

The first thing investors should remind themselves is the situation now is not any different to the past.

"There has always been uncertainty in many forms," said Kerr.

"There have been wars, famines, booms and busts, almost every imaginable event under the sun and markets have always gone on to make all-time new highs."

If you look at 100+ year graphs, share markets push upwards — as long as one stays invested.

"Volatility is just the risk that you have to take to achieve those higher long term expected returns from growth assets," said Kerr.

"You have to embrace uncertainty if you want to reap the rewards that markets can offer."

Even though share prices represent the worth of businesses, in the short term they're set by supply and demand for a particular stock.

"This is independent of the fundamental value of the underlying securities," Kerr said.

"So in the short term, anything can happen. But over the long term, the returns that tend to show up are very likely to be positive and reflective of business growth."

The folly of dollar-cost averaging

So there are volatility risks of being in the market. What about the risks of being out of the market?

Kerr reckons having your money doing nothing, especially in this zero-interest rate climate, is not ideal.

"With capital sitting in cash in the current climate you are receiving a negative real return after inflation is taken into account, which is not a great strategy," he said.

"You might be waiting for a pullback that never comes. You may miss the boat and markets might take off again and you miss out on potential gains."

There are many experts who espouse dollar-cost averaging as a way to protect oneself from volatility in ASX shares.

But actually, Kerr quoted a Vanguard white paper that concluded 2 out of 3 times investors are better off investing a lump sum than spreading it out over time.

It seems dollar-cost averaging is more mental relief than financial nous.

"Vanguard's research shows that investors get better outcomes by lump-sum investing as they have more capital in the market for longer," said Kerr.

"This may be more difficult psychologically if you are concerned about the value of your investment decreasing in the short term but gives you better long term outcomes more often than not."

The share market symbolises human achievements, according to Kerr, and that will not abate regardless of pandemics and inflation.

"People are always going to innovate and create new products and services and bring them to the market," he said.

"My bet is that history will likely repeat itself and we will look back at this time in the future and wonder what everyone was worrying about and were very glad we invested for the long term when we did."

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.

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