Own ASX shares? Expert reveals why uncertainty and risk are not the same

If you own ASX shares you’ll almost certainly be facing the twin concepts of risk and uncertainty today.

With news out that Russian forces have entered Ukraine’s separatist Donbas region, ASX shares are, broadly, taking a beating.

At time of writing, the All Ordinaries Index (ASX: XAO) is down 2.9% for the day.

That’s part of the inherent short-term risk that comes with investing in the stock market.

But as George Wong, a senior financial advisor at Kauri Asset Management, explains, we shouldn’t conflate risk with uncertainty.

A tolerance for uncertainty when investing in ASX shares

According to Wong, courtesy of Live Wire:

One of the common misconceptions in the market is that uncertainty and risk are the same thing. While they may be interconnected, given uncertain events tend to be risky in nature, there is an important distinction that often goes without observation.

First, risk is a probability of an undesirable outcome, which in the market would typically be a permanent loss of capital.

However, a decision mired in uncertainty may be beneficial to achieve a desirable outcome, provided you have done your due diligence in order to mitigate your risk.

Investors opting for for the potentially higher returns from ASX shares over a bank deposit can generally tolerate some uncertainty.

“This is why people invest in the stock market instead of putting money in the bank, as most have a tolerance for the uncertainty that may be required in order to generate what are typically higher returns compared with cash,” Wong said.

But that tolerance for uncertainty is likely to vary with age. For good reason.

Take younger investors seeking to build their long-term wealth and beat inflation, for example.

“The certainty of a fixed-rate of return associated with investing in cash is unlikely to help a young investor achieve a desirable outcome,” Wong said. “On the other hand, someone nearing retirement would be well served by more certainty and stability in their investment environment.”

Embrace uncertainty

Understanding the difference between risk and uncertainty when investing in equities like ASX shares “is at the heart of being able to identify investment opportunities, even during a volatile period as we are witnessing right now,” Wong said.

“This is because uncertainty often presents itself as a risk to investors, prompting losses across the market to snowball,” he added. “When this momentum leads to mispriced outcomes, uncertainty provides investment opportunities for those with conviction to buy. This is why we should embrace uncertainty.”

The post Own ASX shares? Expert reveals why uncertainty and risk are not the same appeared first on The Motley Fool Australia.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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