Beginner investors that are considering investing in ASX shares are choosing a monumental time to do it amid the declines and interest rate rises.
There is a lot to know about investing. Picking the right investment is an important part of it, sure. But, investing can also be about patience, bravery and knowledge.
ASX shares are not like term deposits. There is more risk involved, in a number of different ways. But there is good growth potential as well.
It's important not to be side-tracked from building wealth. Hence, keeping these things in mind for beginners could help:
Compounding takes time
ASX shares are not get rich-quick schemes, though it is possible for some investments to rise quickly.
If people treat investing in ASX shares like betting at the casino, then I don't think that's the right way to go about things.
Looking over history, ASX shares have returned an average of 10% per annum. But that doesn't mean the market returns a consistent 10% each year. One year the return could be 15%, the next year it could be 5%. But the annual return takes a whole year to be achieved, it's not just what happens in January, February or June.
There aren't many other things in life that we have to wait for like shares. Compounding takes time and patience.
If $1,000 were invested in shares and it returned an average of 10% per annum, it would take less than eight years to double to more than $2,000. But, like the disclaimer says, past performance is not a reliable indicator of future performance.
Large declines are unpredictable…sort of
Sometimes the value of shares can go backwards in one year. Sometimes by quite a lot.
When the share market is open, prices are changing all the time. While we hope that share prices go up over time, I think it's important to acknowledge and keep in mind that share prices do go down heavily occasionally. By keeping that in mind, it will mean the declines are less of a shock for beginners (and all investors). We just don't know when that next crash is going to happen, or how long share valuations will stay 'crashed'.
The average return per annum of 10% includes all the crashes of the past like the GFC.
I don't sell my shares just because the prices of my investments have gone down. Indeed, I try to invest in ASX shares that I think have good long-term potential and I'd want to buy more of if their price dropped. I'm using the current drop as an opportunity to buy discounted businesses.
Investors don't know when the next crash is coming. The GFC was largely unexpected beforehand and there was a lot of fear during it. Prices can drop a lot when there's uncertainty. Right now, there's a lot of market uncertainty surrounding inflation and potential interest rates.
Bonus tip: Australia is only a small part of the global share market
A beginner investor may also want to know that ASX shares are only a small part of the global share market.
There are plenty of businesses listed in the US, Europe, Japan and so on.
I'm not saying that beginner investors should ignore ASX shares.
But, it could be worth knowing about investments that can give easy access to global share markets such as iShares S&P 500 ETF (ASX: IVV), Vanguard MSCI Index International Shares ETF (ASX: VGS) and VanEck Morningstar Wide Moat ETF (ASX: MOAT). Diversification is a very useful tactic for investing because it lowers risks.
