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How To Make Money In A Flat Market

The Motley FoolIf you went to bed on the last day of 2012 and didn’t wake up again until today, then apart from having overslept badly, you may be forgiven in thinking that the Singapore stock market has been hibernating all that time as well.

On the 31 December 2012, the Straits Times Index stood at 3,167 points. Today it is around 3,190 points – a miniscule rise in the grand scheme of things.

Is that it?

You may well ask if that is all that the stock market has to offer – a handful of points after eleven long months. What a waste of time.

Of course, we mustn’t forget the 3% or so of dividends that has been paid out during that time. But even still, a few crummy points and a 3% dividend yield are not going to make any of us very rich.

It is true that the Singapore market has been largely flat this year. But as we all know, the stock market is no different to any other market. At any moment in time it is made up of buyers and sellers who compete to acquire and dispose of shares.

A flat market would, therefore, imply a distinct dearth of people who want to buy shares and a significant scarcity of those who want to sell their stock.

But that’s ok.

We Fools are long-term investors. We don’t need a high-octane market to get our investing juices flowing. We invest in companies for the long haul. So, just as Warren Buffett doesn’t need a daily quote on his 7% stake in Coca-Cola to validate his financial well-being, we don’t need a rampant stock market to know that Singapore companies are doing well.

But here is something else to consider.

The here and now

Since 1988, the Straits Times Index has been higher 60% of the time five years later. So the market was higher in 1993 compared to 1988; it was higher in 1994 compared to 1989; it was higher in 1995 compared to 1990 and so on.

What’s more, since 1988, the benchmark index has been higher 75% of the time 10 years afterwards. But hold your horses – things get even better.

If you take a 15-year time frame, the stock market has a 90% of being higher one-and-a-half-decades later. And if you push the investing period out to 20 years, then it is almost a nailed-on certainty that the market could be higher two decades later.

That is what is meant by long term investing. But the good news doesn’t stop there.

Since 1988, the Straits Times Index  (SGX: ^STI) has risen from around 999 points to around 3,190 points today. That equates to an annual increase of roughly 5%. Tack on the 3% dividends that you receive annually and you have a total return of about 8% per year.

That may not seem like much. But an 8% total return is really quite decent.

If in 1988 you had regularly invested S$200 a month into a stock market index tracker, you would have seen the investment grow to around S$190,000 after 25 years. If the regular monthly investments had been S$1,000, then the pot would have grown to almost $1 million.

Schoolboy error

Point is, flat markets don’t remain flat for long. So don’t make the mistake of believing that you need to regularly stir the pot to achieve better returns. That is a schoolboy error made by not only many private investors but by professional investors too.

The principle applies not only to investing through index trackers but also to investing in individual stocks. You don’t need to churn your portfolio to achieve better returns. Churning is great for making butter but not for making money.

When we invest, we are essentially buying a small stake in a business. If the business does well, then the share price will eventually follow. It really is that simple.

One of the best pieces of advice on investing I have ever heard is to treat the stock market as you would your current account – just keep adding, adding, adding money to it whenever you can afford.

The reason for doing so is head-slappingly obvious.

The market has a 60% chance of being higher five years from now; it has a 75% chance of being higher 10 years from now; it has a 90% chance of being higher in 15 years’ time and it is almost certain to be higher in 20 years’ time.

That is why we say that it is time in the market that counts, not timing the market.

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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 Director David Kuo doesn’t own shares in any companies mentioned.