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The Stock Market Is In A Correction. What Should We Do?

As I wrote yesterday night, the Straits Times Index (SGX: ^STI) has entered “correction” territory – defined as a drop of 10% or more. It closed at 3,056 points on Thursday, and is currently down 0.1% to 3,055 points at the time of writing, further exacerbating the correction.

Singapore’s cheap markets

That seems scary. But if anything, all the correction does is to give Singapore’s stocks a lower valuation when compared to other international markets.

Index (country) Level Trailing Price Earnings Multiple
S&P 500 (USA) 1,776 18.7
FTSE 100 (UK) 6,445 16.1
S&P/ASX 200 (Australia) 5,098 23.1
Nikkei 225 (Japan) 15,342 14.4
Straits Times Index (Singapore) 3,055 12.1

Source: S&P Capital IQ; Data for SPDR Straits Times Index ETF

Cheaper blue chips?

Within the Straits Times Index, we even have some of the blue chips selling at a price-to-earnings ratio that is lower than that of the market average. These include real estate developer and manager Hongkong Land Holdings (SGX: H78); the banks DBS Group Holdings (SGX: D05) and United Overseas Bank (SGX: U11); and the conglomerate Keppel Corporation (SGX: BN4).

Company Price: 12 Dec 2013 Trailing PE multiple
Hongkong Land US$5.80 9.6
DBS S$16.60 10.4
UOB S$20.46 11.0
Keppel Corp S$10.86 11.0

Source: S&P Capital IQ

But we’re not looking at those blue chips – that’s not the point here.

The point is to find out what should we do when the stock market is in a correction, as it evidently is right now. But before you batten down the hatches and think that the sky is falling, let’s look back on what history can teach us about market corrections.

What history tells us about market crashes

As the very first incarnation of our local stock market only appeared in 1973, there’s a shortage of solid historical data as compared to the stock market of say, the United States. So, let’s take our cues from the Western economic giant.

My American colleague Morgan Housel once did a nifty piece of work by studying the frequency of stock market crashes in the country going back to 1928. Here’s what he found:

Magnitude of market crash Historical frequency
10% Every 11 months
15% Every two years
20% Every four years
30% Every decade
40% Every few decades
50% 2-3 times per century

Over the past 85 years in the USA, its stock market has fallen by 10% from a recent high every 11 months – that’s more than once a year. When looked at through the lens of history, a market correction suddenly seems mundane and boring.

And it really is, contrary to what most financial media might be telling you whenever the markets experience a significant pull back. In the same article where he displayed his table of frequency of market crashes, Morgan wrote:

One of the most common questions financial TV hosts ask their guests is whether they expect a pullback or a crash to hit the market. It’s an odd question, akin to asking whether they expect summer to occur. Of course summer will occur, and of course stocks will pull back.”

That’s snarky. But it’s true. And here’s the kicker: Despite the S&P 500 displaying ostensibly large amounts of volatility in the past 85 years, it has climbed by 10,000% to where it is today since the start of 1928.

We are one

While I certainly do acknowledge that our local market is not a close parallel of the American one, we can still benefit when we take a look at markets that have had a long history of existence to see what we can learn from them.

That’s because, despite vast cultural differences between people from different parts of the world, there are still a great deal of similarities that exist in human nature.

Financial advisor and behavioural investing expert Carl Richards once said (link goes to a video: watch from 43:00min to 45min) that he was struck by how greed and fear toward money and wealth was almost universal in the people of all the different countries he’s been to. And incidentally, greed and fear are likely to be the two strongest human emotions driving the markets here, in the USA, and everywhere else in the world.

Foolish Bottom Line

So, looking at what history has taught us, the next time you see the markets experience a pullback, or correction, or crash… don’t panic. It’s normal, and part and parcel of what investing is all about.

If anything, when markets start to fall, start coming up with your own wish list of shares you’ll like to invest in at lower prices. And just to bring home the point, when markets fall hard, what we should be doing is to invest.

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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.