One Important Thing You Should Be Doing In a Stock Market Decline Now

The Straits Times Index (SGX: ^STI) in Singapore hit a recent high of 3,465 points back in 22 May 2013. At the time of writing (3:15 pm, 4 Feb 2014), the index is sitting at 2,961 points. That represents a drop of some 14.5% from the May 2013 peak.

For investors who decided to cash out on Singapore’s stock market prior to that steady decline that took place from last May onwards, the decision to do so must have seemed like a smart one on hindsight. But, a failure to reinvest into the market might make a smart short-term decision look like a bad one over the long-term.

Healthcare operator Raffles Medical Group (SGX: R01) was selling for S$1.51 apiece back in 11 Oct 2007 and valued at 25 times trailing earnings. For an investor who felt the share was pricey then and decided to cash out, it was a great move in the short-run as Raffles Medical Group’s shares proceeded to fall by 46% to S$0.815 exactly a year later on 11 Oct 2008.

But here’s where it gets interesting. The company’s shares are now selling for S$2.99, almost double what it was worth back in Oct 2007 as Raffles Medical Group’s earnings increased by 98% from S$31.3m back then to S$62m today. An investor who sold the company back in 11 Oct 2007 and who subsequently remained in cash all the way would have been better off just staying invested.

Of course, for every Raffles Medical Group, there’s also a Cosco Corp. (SGX: F83). The shipping firm was trading at S$6.90 in 11 Oct 2007 before collapsing some 90% or so to today’s price of S$0.70 as its earnings fell by more than 80% in the interim.

This goes to show that staying invested is not always a good idea. That said, it takes nothing away from the fact that holding shares of growing companies through a market’s peaks and troughs can be a good thing to do, as exemplified by Raffles Medical Group.

In any case, it’s anybody’s guess as to whether Singapore’s shares will continue falling. But if you think it will decline further and have decided to raise cash in preparation for that, be sure to have a clear subsequent plan of what to do with all that cash – that’s the important thing you should be doing in a market decline.