Three Facts About The Straits Times Index To Put Market Ups-and-Downs Into Perspective

Ser Jing - Three Facts About The Straits Times Index To Put Market Ups-and-Downs Into Perspective (pic) 

The Straits Times Index  (SGX: ^STI) is perhaps the most widely used barometer for Singapore’s stock market. It closed at 3,173 points yesterday. This meant that the index had risen by almost 5.5% per year for a total gain of 280% since the start of 1988 when it was at 834 points.

But, those weren’t smooth gains. The market had to go through some rocky times to get to where it is. Take for example, the year 1998, which saw the STI get pummelled as a result of the Asian Financial Crisis. The index fell by fifty-two percent from a high of 1,699 points in March that year to a low of 805 points in September.

In fact, it’s not that uncommon to see the STI decline by large amounts (as I’ll show shortly), so much so that market pullbacks are almost akin to a fact of life.

But the thing is, even if people know that the markets can swing wildly at times, they still tend to freak out when the markets turn south. Perhaps, market participants tend to forget just how volatile stocks can be.

In trying to address that, I have here three quick facts on the STI’s ups-and-downs over the past 25 years since the start of 1988. These facts can help put the market’s wild gyrations into perspective, seeing that the STI had gone through a 280% ascent despite the volatility.

1) It is not uncommon at all for the STI to decline by 20% or more

I took historical data of the STI from Yahoo Finance and looked at the percentage declines in each calendar year from the index’s annual-peak to its subsequent-trough. Turns out, in 25 full calendar-years, the STI has declined from its annual-peak to its subsequent-trough by more than 20% in eight separate years. That’s almost one-third of the time and yet market participants anecdotally find out that their stomachs start churning even at 10% pullbacks!

2) The STI’s not getting any more volatile now than it did in the past

On average, the STI closed up or down by more than 1% for 73 days each year since 1988, signalling to investors that the market is inherently jumpy.

But, investors who are worried about day-to-day fluctuations in price might be surprised to know that the markets have not been getting any more volatile despite recent price declines that make us feel otherwise.

I measured the number of days where the STI closed up or down by more than 3% from the start of 1988 to 19 August 2013 and repeated the exercise for a 5%-or-more movement. I then split the time frame into three distinct periods: from Jan 1988 to Dec 1999; from Jan 2000 to Dec 2009; and from Jan 2010 to August 2013.

The results are shown in the chart below (I’ve shown a similar chart and discussed its implications in a previous article found here):

3 facts about STI

3) The longer you stay invested in the index, the lower the historical odds of you losing money

I’ve shown the following three charts in a previous article. The charts show the returns an investor could have gotten had he invested in the STI for three different holding periods of one year, 10 years, and 20 years respectively.  At a holding period of one year, losses occurred 41% of the time. At a holding period of 10 years, losses occurred 19% of the time.  And finally, for a holding period of 20 years, there were no losses occurred at all.

Simply said, your odds of losing money in the index, based on its historical performance, are dramatically reduced the longer you stay invested.

Foolish Bottom Line

There are bound to be pullbacks and crashes in in the stock market in the future. That’s just what stocks do.

If we are aware of how frequent crashes can occur as well as have an inkling of how volatile the markets can be, it can help us maintain our calm in the face of the next downturn. That calmness can then enable us to make rational and intelligent investing decisions in the face of panic elsewhere.

As for those who cry that “The sky is FALLING!” each time the market plunges, I’ll leave them with an anecdote regarding one of America’s most prominent bankers, J.P.Morgan.

Reputedly, Morgan was once asked what the stock market will do. His reply? “It will fluctuate.” Wise words indeed.

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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 doesn’t own shares in any companies mentioned.