Do you think shares are risky?

There seems to be this great deal of confusion around the real meaning of risk when talking about the share market.

As far as I am concerned, the share market is the lowest risk asset class available to regular investors. Due to the silent killer of inflation, cash is by far the highest risk asset, guaranteeing the eventual destruction of your wealth.

I’ll let you in on a conversation that I have far too often. I am pretty silly because I continually get myself into conversations just like this one:

Non-shuffler: Hey Pat, when are you going to buy a house? Pat: Maybe in a few years, right now I prefer to invest in shares. Non-shuffler: What! Shares are risky, you could lose everything, it’s like gambling! Pat: Well no it isn’t. If you invest in a well diversified portfolio, all the historical data suggests that your money always grows over the long term. Non-shuffler: Well my uncle bought BHP shares and lost half his money. Pat: Yeah, but that’s because he sold into a bear market and he didn’t diversify across lots of companies. Non-shuffler: It goes up and down, it’s like gambling. Pat: The ups and downs don’t actually matter at all, the dividends keep coming in and the share market continues to grow over the long term. Non-shuffler: *…another anecdote*

It goes on like this until I give up.

There is so much misinformation and stigma surrounding the share market. Most believe it is only gambling and that only the experts who have studied it for years can beat the system and make money.

I can completely empathise. I grew up in a family in which the same stigma was propagated. It is hard to realise that everything you believe about a topic is utter nonsense when you have been indoctrinated with that nonsense your entire life. At some point though, I decided to do my own research and came to the only logical conclusion. The share market is one of the best wealth creation tools available to you and I.

Volatility does not equal risk.

The pervading norm is to equate risk with volatility. Using the word risky for the word volatile is the most pervasive misnomer in common use that I know of. It truly shows the powerful nature of perception against the actual reality.

I will remind you here of a graph I have presented before, showing the reality of share market wealth creation and term deposit wealth destruction.

This misinformation is caused by a couple of key factors;

time (or lack thereof)

liquidity

volatility

The volatility of the share market is a direct result of its liquidity. Shares can be traded almost instantaneously at very low cost, with immediate access to share price quotes at any time. Because of this extreme liquidity, people are able to inject their emotion, fear and irrationality into the share market, causing the insanity you see on a daily, weekly and monthly basis.

To illustrate this insanity, below is a graph showing the Australian All Ordinaries plotted monthly.

There are quite a few peaks and troughs in there, including Black Tuesday (Monday) and the GFC, which is still fresh in the minds of the older shufflers out there.

However, does anyone actually believe that a company’s value changes in a perceptible way on a daily basis? Or does anyone believe that at the lowest point of the GFC, when share prices fell 40%-50%, that companies were 40%-50% less profitable than they were before the GFC?

To overcome this insanity you could choose to check the share market far less often. For a shuffler that checks share prices once per year, the share market looks something a little more like this:

A lot of the noise has been taken right out of the graph!

However we can do much better than that. The shuffler that looks at the share market only once every 5 years experiences it very differently to the insane day trader.

By now you must know where I am going with this.

When thinking in very short time frames, share market volatility is risky. But we are talking about investments here. No one should be thinking about any investment with a short time frame in mind. Knowing this, a herculean Shuffler can decide to look at the share market once every 10 years only.

For this herculean Shuffler, the share market looks quite different:

This is actually the graph that matters and is the one that I am the most interested in when considering share market performance. This shows that as long as you have a long time frame for investment, then volatility completely disappears.

You can keep up to date on share prices for reasons like checking your allocations and staying on the lookout for bargains. Not to have an emotional response to the size of your portfolio.

For this reason, I choose to ignore the day to day insanity and plough my money into the market.

Shuffling time frames

Pat the Shuffler

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