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Is It Dangerous to Invest Now?

There’s an old saying that share prices often climb on a wall of worry and the experiences of investors in the stock market these past few years have certainly added substance to that saying. Take a look at this chart of the Straits Times Index (SGX: ^STI) from Yahoo Finance Singapore:

Dangerous to invest now chart

The STI has registered a 117% increase from its trough on March 2009 to its current price of around 3280. From 2009 to March 2013, bad news just seemed to keep coming – financial institutions around the world feared for their lives in 2009 due to excessive risk taking; British Petroleum’s oil rig explosion in 2010 dominated headlines along with European fiscal woes; 2011 saw numerous countries undergo political upheaval under the Arab Spring followed shortly by the tragic Japanese earthquake; and finally, in 2012, the American fiscal cliff gave everybody jitters. As the saying goes, when it rains, it pours.

As you’re faced with such dramatic news from all over the world, it might make you wonder, “Will there ever be a moment of peace, or less uncertainty’’? The financial media craves ‘certainty’ as they feel that investing can be safer, less risky, and more profitable when things are more ‘certain’. But yet, throughout all these worries, the stock markets continue to climb and Singapore is not alone, as the MSCI World Index, which measures the returns of various stock markets around the world, has almost doubled to 1430 since March 2009.

Throughout these four years, market commentators and investors saw risk in every corner. At the STI’s trough in March 2009, the index’s trailing Price-Earnings multiple was around 6, way below its historical average of around 15. Only extreme fear and risk aversion (investors were scared stiff by the Global Financial Crisis of 2007/2009 and believed that risks in investing were at its highest) could bring down valuations for the overall stock market to such low levels.

But, paradoxically, it was the market’s extremely low valuation in 2009 that set up the stage for its gangbuster-like returns over the next four years. The STI’s performance from 2009-2013 is a microcosm for the ‘perversity of risk’ when investing. Howard Marks from Oaktree Capital summed it up brilliantly by writing:

 “The riskiest thing in the investment world is the belief that there’s no risk. On the other hand, a high level of risk consciousness tends to mitigate risk. I call this the perversity of risk.”

In 2004, Ben Bernanke, then a Governor of America’s Federal Reserve System, gave a speech (warning: very technical speech) about taming the economic cycle and thus removing risks. Fast forward 3 years later, and the world was staring at a financial abyss brought on by excessive leverage stemming from a belief that risks were minimal. So, when you want to invest, look around you – is there widespread belief that it is not risky to invest now?

The SPDR Straits Times Index ETF’s (SGX: ES3) current PE (which is a close proxy for the STI’s valuation) stands at 13.2 and is still below the STI’s historical PE average. News around the world is still largely fretful about how things can go wrong and there’s a lack of unbridled exuberance now. No one can tell the future but we can gauge the current risk appetite of the financial world and adjust our behaviour accordingly. After all, like Warren Buffett said, ‘Be fearful when others are greedy and greedy when others are fearful’.

Keep up with what’s happening in today’s markets and learn how to GROW your wealth in the years ahead with your FREE subscription to Take Stock Singapore. Click here now for your free subscription. Take Stock Singapore is The Motley Fool’s free investing newsletter written by David Kuo.

The Motley Fool’s purpose is to help the world invest, better. The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Contributor Chong Ser Jing doesn’t own shares in any companies mentioned.