It's fair to say one of the most prominent reasons why more people don't invest in ASX shares is volatility. Whether someone invests or not, they probably know the share market can indeed be a volatile place. Every time there is a share market crash, or even a big sell-off, it makes headline news. Australians are told of the 'billions' wiped off the markets.
Additionally, we are told of the wild success stories of investing, as well as the abject failures. Everyone has heard a story about the person who invested $1,000 into a pharmaceutical or biotech share and pulled $100 million out. Or else of the unlucky soul who lost everything on a would-be gold miner.
Stories like these lead to the misplaced reputation of the share market, in some quarters, as a kind of wild-west casino.
However, the realities of stock market investing couldn't be further from this perception. Sure, if you want to gamble, you can certainly do so on the stock market. But most investors, at least the successful ones, don't gamble. They use the share market to invest their money in successful businesses and make money over long periods of time.
But there is no escaping the fact that shares can be, and often are, volatile. We humans like control, especially when it comes to our money. It certainly feels nicer to have your savings in a bank – the capital protected, with the only changes being the steady stream of interest every month.
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Why you should embrace volatility when investing in ASX shares
So why even bother with shares then? Well, it's simple – shares consistently offer far higher rates of return than cash does. That's a fact that we've talked about here at the Fool on countless occasions. Volatility is the price we pay for those higher returns.
Yet volatility, while scary, can be your friend, if you let it be. But why listen to me, when you can earn from legendary investor Warren Buffett?
Back in 1993, Buffett told his fellow shareholders of Berkshire Hathaway the following:
The true investor welcomes volatility. A wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly.
Thus, volatility gives all investors the chance to buy their favourite companies for a price that is irrationally lucrative.
I'll give a personal example. I invest in Apple Inc (NASDAQ: AAPL). The company is part of my portoflio because I believe Apple is one of the best companies in the world, with a phenomenal brand, attractive products, and top-notch management. I fully expect Apple to be around in ten years' time, as an even larger and more successful company than it is today.
Because of this conviction, I would be delighted if my Apple shares fell by 50% tomorrow. It would give me a rare chance to buy up far more shares than I currently own which, if my thesis proves correct, would boost my wealth considerably in coming years.
It can certainly be terrifying to see the values of our investments decline on paper. But once an investor realises that volatility is an inherent and unavoidable part of investing, they can learn to use it to their advantage.
Remember, shares go up far more often than they go down. That's why the markets hit new all-time highs every few years.
