The Market Is Volatile – Get Used To It

roller coaster

According to Yahoo Finance, Singapore’s most widely quoted stock market barometer, the Straits Times Index (SGX: ^STI), started 1988 at 834 points. Since then, it has grown 265% to 3,048 points as of 6 Sep 2013. That equates to a compounded annualised return of around 5.1% (exclusive of dividends) on average for those 25-plus years.

If you had plonked some cash into the index at the start of 1988 and not bothered to check your investment until now, I’m guessing you’ll be quite satisfied by it as you’ll have more than doubled your money in nominal terms in addition to handily trouncing inflation – Singapore experienced a rise in the Consumer Price Index (inflation is measured by tracking the changes in the CPI level) at a compounded annualised rate of 2% from 1988 to 2012, according to The Singapore Department of Statistics.

Furthermore, dividends would have probably juiced up the STI’s returns by two to three percentage points per year on average (for instance, the SPDR STI ETF (SGX: ES3), an index tracker that closely mimics the construction of the STI, has a dividend yield of 2.78% as of 05 Sep 2013), increasing the total returns you would have enjoyed.

So, we could be reasonably looking at an annualised return of around 7% on average for the STI stretching over the past 25-plus years since 1988.

But, that statement in itself might be misconstrued by some to mean that Singapore’s stock market had returned 7% every year. That is, to put it mildly, a sorely mistaken notion.

The stock market has been volatile, is volatile, and in all likelihood, will remain volatile in the future. That’s because volatility in the markets – the act of stock prices swinging wildly up and down – is just a function of what stocks do.

Here’s how the STI has done since 1988:

Market is volatile chart

Source: Yahoo Finance

It might be surprising to you, but what you’ll see is the STI rarely spends time near the ‘happy-medium’ of a 7%-per-annum-return. In fact, the index has only had an annual return of between 0% and 10% in two years since 1988. Most of the time, the markets have been wild, such that seeing the STI jump by more than 50% in a year, or collapse by close to half, is not that surprising at all.

Saying that the market has grown by 7% per annum on average does not mean it would appreciate along the path of a nice, gentle slope. Stock prices, over the short-term, get dragged all over the place as dictated by the capricious nature of the aggregated-moods of stock market participants as a whole.

But over the long-term, stock prices of various businesses would gravitate toward their respective underlying intrinsic values that are in turn determined by the fundamentals of the businesses.

We could look at the market’s violent swings and get scared out of it, in the process shutting off an avenue that has historically shown to be a great way to build long-term wealth.

Or, we could focus on how the STI has, over time, grown by 265% since 1988 as a reflection of the growth of Singapore’s various businesses – as exemplified by the increase of our country’s Gross Domestic Product (a proxy for the economic output of businesses) from U$26.5b in 1988 to US$276.5b in 2012.

This brings us to the question: Will the STI achieve new heights in the future? It might, if you think Singapore’s economic conditions, along with the profits generated by the businesses here, can continue to improve in the future as it did in the past. On the other hand, it might not if you believe the long-term future of our country is in dire straits.

Ultimately, the future is inherently uncertain but we can use what has happened in history over long-spans of time as a guide to clue us in to future expectations. Until then, however, expect volatility. Lots of it. The market, as I’ve shown, is volatile. We have to get used to it.

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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.