Most Aussie investors experience ASX share losses at one point or another. It is a part of investing. The possibilities are too broad to get it right all the time.
However, investing in the S&P/ASX 200 index (ASX: XJO) has proven to be a long-term wealth-building strategy for many Australians.
So while the prospect of investment losses can deter potential investors, the key to minimising these risks might be simpler than you think. Let's see what the experts have to say.
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Why long-term investing reduces ASX share losses
According to the Finder 2024 Wealth Building Report, the data is clear: Patience pays off for long-term investors in the share market.
Market fluctuations can lead to losses over shorter investment periods, with a one-month holding period showing positive returns just 58% of the time.
Stretch that investment horizon to three months, and the success rate increases to 60%. A year brings it to 65%.
Meanwhile, hold a portfolio of shares for a decade, and the probabilities show an astounding 98% likelihood of profit.
The thing most investors fail to consider, especially early on, is that you need time for the mathematics to start working in your favour. And lots of time. A few months, even a couple of years, isn't sufficient.
Finder's findings show that the volatility of the ASX 200 diminishes over time, rewarding investors who can endure its ups and downs.
Managing risk doesn't mean avoiding it
While avoiding investment risk altogether might feel safe, it's far from financially prudent to attempt to avoid ASX share losses altogether.
Inflation erodes the value of stagnant savings, making inaction riskier than strategic investing.
For instance, findings from The Wealth Building Report show that money left in a savings account earning 4% per annum may fail to outpace inflation.
This is especially true during periods like the past two financial years, where inflation averaged 5.6% annually.
Conversely, investing in an index fund like the ASX 200 offers the potential for returns that comfortably outstrip inflation.
Meanwhile, Morgan Stanley says there are five common mistakes that investors make when markets get a bit choppy.
They panic sell, hold too much cash, make poor judgements, and, among other things, add to their losses. According to Morgan Stanley:
Investment losses are painful, but if investors can stay focused on their goals, rather than obsessing over monthly account statements, they will likely feel better and be better off in the long run.
Graham Cooke, head of Consumer Research at Finder, agrees:
Some investors fall into the cycle of buying and selling based on market swings, often leading to more losses. Over time, however, it's evident that a long-term approach can improve the likelihood of positive returns.
The ASX 200 index, tracking the 200 largest ASX companies, illustrates the value of patience. Finder's data on positive returns by investment period shows how returns become more consistent over time…
… This data clearly supports the case for patience and longevity in the sharemarket. Instead of frequently trading in and out of stocks in an attempt to catch the 'right' moment, investors can benefit more from allowing their investments to grow over time, riding out the natural market fluctuations.
To cap this off, just have a look at the compounding value of the ASX 200 over the last 10 years. Think about what the value of $1 is worth over this entire span. Now consider, frequently adding to this portfolio, how much greater the value will be.
How to minimise ASX share losses
There is no one thing you can do to prevent all investment losses. But we can use the power of time and compounding to our advantage.
Frequent investing and consistent contributions are time-tested methods for growing wealth. Nearly 12% of surveyed investors in Finder's report cited regular investments as their primary wealth-building strategy.
Instead of trying to time the market, one should let compounding work its magic.
So if you're looking to reduce the risk of ASX share losses, consider this: Stick to a long-term investment strategy, embrace manageable levels of risk, and let your portfolio grow over time.
