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One Huge Reason the Share Market Can Continue Rising – And Why That Makes Me Sad

The Great Financial Crisis of 2007-09 kicked into full-gear some six or seven years ago and caused the Straits Times Index (SGX: ^STI) to plummet almost two-thirds from its pre-crisis peak. Since then however, the index has rebounded by some 125% from its trough to its current level of 3,277 points.

Although Singapore’s share market bellwether is still 15% below its pre-crisis peak of 3,876 points reached in October 2007, the recovery these past few years has still been really strong. Unfortunately, there’s reason to believe that a significant proportion of Singaporean investors had suffered the collapse but hadn’t enjoyed the recovery.

According to a recent May 2014 survey by financial services and investment management outfit State Street, Singaporean investors (the survey had been conducted on retail investors in 16 countries, including those from Singapore, with assets ranging from less than US$250,000 to more than US$1 million) had an average cash allocation of some 46% amongst their assets. Despite the strong gains in Singapore’s share market since 2009, investors still seek comfort only in cash as the “crisis of 2008 is burned into their memories.”

That large proportion of cash sitting on the side lines is what may give the share market a reason to continue rising. As the legendary investor Sir John Templeton once said, “Bull-markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.”

With that much cash not in the share market, there’s a case to be made that we’re still in the “scepticism” phase of a share market rally. It must be noted though, that I’m personally agnostic on what this really means for the share market – but make of it what you will based on the information I just shared.

Either way, the real head-turner for me in the State Street survey wasn’t the implication of what doubtful investors might mean for the share market in the future – the shocking and sad thing for me is the level of mistrust that investors have in the financial markets in its ability to build lasting long-term wealth.

Like State Street said, investors had the experience in the recent Great Financial Crisis “burned into their memories.” State Street also shared that “younger generations in particular are wary of investing in what they perceive to be “risky” assets. Many of these investors experienced back-to-back crises and they simply don’t trust the markets.”

Over the long-term, as measured in decades, the share markets, particularly in the US and Singapore, have been shown to be able to perform well. Young folks who aren’t investing would lose out on the chance to take advantage of the magical effects of long-term compounding in shares. Older folks who used to be invested but have since pulled out due to fear, have not given themselves the chance to allow time to help repair and build their portfolios. Such situations honestly sadden me.

It’ll be great if we can get a good indicator that share markets can continue climbing in the future. But, I would never want the foundations of any possible increases to be built upon individuals who have simply made honest mistakes in their investing activities.

If it were up to me, I’d gladly trade a stock market that can rise in the future for one that will go flat for some time if it meant that the latter would see the majority of individual investors having managed to benefit from past growth in the share market.

Sadly, the latter isn’t happening, judging from the numbers State Street had reported.

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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.