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."
