Seeing one of your ASX shares drop by over 10% in value can be very concerning. It becomes even more stressful when your entire portfolio declines amid a trade war. As a result, anxious investors might consider selling.
The new US President, Donald Trump, has decided to impose tariffs on Canada, Mexico, and China across a range of products. China and Canada responded with tariffs of their own on the US. Trump has also said that all steel and aluminium imports will have a tariff of a minimum of 25%. The EU subsequently announced retaliatory tariffs. Trump is also considering tariffs on all countries that apply tariffs/taxes on US goods.
As you can imagine, these actions are creating uncertainty for businesses, investors, supply chains, and profit outlooks.
What are we supposed to do now? I don't think selling is the answer for a few different reasons.
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Understand our human nature is trying to take over
Our human instincts are usually very good at protecting us from physical danger, like staying away from wild animals and avoiding falling off cliffs.
However, that same desire to avoid loss can lead to inferior outcomes when it comes to the share market.
Loss aversion is a concept that suggests we feel the impact of a loss more keenly than the joy of an equivalent gain. Meaning that losing $1,000 is far more painful than the joy of a $1,000 win, even though it's the same amount. Trying to avoid losses may not help in the long term.
I'm not saying never sell, but selling just because an investment has already declined may not be the best decision.
It's normal for the ASX share market to experience volatility
The ASX share market regularly goes through ups and downs – there's an element of 'risk'. For the possibility of gains, investors need to be aware that declines must also be feasible.
Every day, trades are completed between different buyers and sellers who are reacting to events happening locally and globally. Sometimes those new developments are positive, such as weaker-than-expected inflation, and sometimes they're negative, such as tariffs.
While it's unnerving, just know that this sort of market action is infrequent but does happen occasionally. Volatility could also occur next year or any particular year.
Think about the long-term
Larger market declines do happen sometimes, like the GFC, COVID, the high inflation period, and so on. But, historically, good businesses and the overall share market have recovered over time. Good companies are capable of growing their profit and increasing their underlying value.
If we invest for the long term, say five, ten, or twenty years, then what happens in 2025 will be old history by the time we get to 2030, 2035, or 2045. Temporary declines don't need to deter our investments.
For example, if we invested in an ASX share with a share price of $20 last year and it reaches $40 in 2030, it doesn't necessarily matter if it falls to $16 this year. Good investments should work out in the long run. That's why I'd only want to invest in businesses that have a compelling long-term outlook. It will hopefully be successful, even if it takes a while for a positive outcome.
A time to buy?
Rather than thinking this tariff trade war is a time to sell, investors may be best served by thinking about buying during this period.
If we had to choose a time to invest, I'd rather do it when prices are lower than higher. I've been using this period to invest in some of my favourite ASX shares rather than selling. It's possible share prices could fall even further, but I'd view that as an even better buying opportunity.
