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Surprise! Straits Times Index Likely To Have An Un-Volatile Year

We’re now almost three-quarters done with 2013 and for investors, there have certainly not been a shortage of talking points in regard to the financial markets.

For a brief – and likely incomplete – recap, there was America resolving its ‘fiscal cliff’ issue (does anyone even remember that anymore?) at the start of the year; there was the Cyprus banking crisis in March; in May, fears of a halt in Japan’s attempted economic recovery under Abenomics were roused; and in June, the markets got spooked after the US Federal Reserve hinted at a possible quenching of its Quantitative Easing programme at the end of the year.

With all these issues and more arising in the financial markets, it might seem logical to think that the stock market had been very choppy so far for 2013. But… things aren’t always what they seem…

Turns out, the Straits Times Index (SGX: ^STI) is well on its way to its second least-volatile year since at least 1988.

I measured volatility by counting the number of days where the index closed either up or down by more than 1% and as of 12 August 2013, this year has delivered only 17 such days. If the trend holds, we’ll see 24 volatile-days by the end of the year. Meanwhile, the record for the quietest year goes to 2005, with 22 volatile-days.

Considering that the average number of volatile-days per year from 1988 onwards was 73, 2013 has been a remarkably ‘quiet’ year.

But what does this mean? Perhaps, having volatile years would mean poorer returns, while quieter years would deliver better results?

Let’s look at the chart below to find out, in which I plotted the STI’s annual return, alongside the number of volatile-days, for each year.

Surprise STI

Source: Yahoo Finance and author’s calculations

Turns out, there’s simply no easily-discernible correlation between volatility and returns based on the chart.

2008 and 2009 were almost equally volatile. But while the former saw the index drop by 40.9%, the latter witnessed a 65.9% climb! 1993 was a relatively quiet year, yet the STI went up by 49.7% to log its third largest annual increase in the past 25 years.

And let’s not forget that the very quiet 2013 has so far seen the STI barely budge from its points-level at the start of the year.

So, coming back to the question of ‘what does this mean’, it seems that the data is driving home the point that it’s meaningless to worry about price volatility. Stocks move up, and then they move down. It’s just as natural a process as night following day.

Instead of worrying whether a volatile market would eat into our returns over the long-term, we should instead be focused on how the STI has managed to almost quadruple from 834 points at the start of 1988 to around 3,200 points today despite the ups and downs.

The answer’s simple: businesses in Singapore, be it publicly-listed ones or private-ones, have been growing all these years, as exemplified by our country’s impressive Gross Domestic Product (a proxy for the output of businesses in Singapore) growth from US$26.5b in 1988 to US$276.5b in 2012.

For more granularity, we also see businesses like Jardine Matheson Holdings (SGX: J36), Jardine Strategic Holdings (SGX: J37), and Super Group (SGX: S10) gaining a 1000% or more over the past 10 years as they grow their sales and profits by multiples over what they made 10 years ago.

Fretting over volatile stock prices and its impact on returns without regard for the stock’s underlying business performance would be akin to missing the forest for a tree.

Ultimately, it’s not price volatility that matters. It’s the business.

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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 owns shares in Super Group.