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The US Markets Have Fallen “Big” Overnight: Should Investors In Singapore Be Worried?

Last Friday, the Dow Jones Industrial Average (one of America’s oldest stock market indexes) fell by 1.79%. The seemingly large magnitude of the fall worried some users in Internet forums dedicated to Singapore’s stock market. “Massive -315 [points] crash in Dow,” screamed the title of one such post; “[I] think many people will be bankrupt on Monday,” came one of the responses to the title.

When I read these forum posts, two issues came to my mind regarding the reactions of the forum users: 1) is there any strong correlation between the movements of the American and Singapore stock market; and 2) how common has market volatility been?

I don’t have any good data for the first. But, I do have some good numbers from S&P Capital IQ about the Dow Jones going back more than eight decades and I’m compelled to share them because like my colleague Morgan Housel says, “People would be less scared of volatility if they knew how common it was.”

There have been more than 21,600 days of trading for the Dow Jones between the start of October 1928 and 12 December 2014. Turns out, of those days, a full 1,242 have seen daily price declines of more than 1.5%. Given this context, last Friday’s fall of 1.79% seems to be nothing out of the ordinary.

In fact, it is trivial when compared to the Dow Jones’ biggest intra-day decline of 22% seen in 19 October 1987 (an event known as Black Monday). That massive crash brought about huge panic in the financial markets worldwide (and especially in the U.S.). Were it to happen again today, it seems downright obvious that the level of fear would be manifold of what some market participants in Singapore (the Internet forum users) are experiencing currently.

But here’s the thing: The Dow Jones closed at 2,247 points on 16 October 1987 (the Friday before Black Monday); today, it’s at 17,281 (a 693% gain!). The oldest pricing data I can get for the Straits Times Index (SGX: ^STI), Singapore’s market benchmark, starts from 28 December 1987. On that day, the Straits Times Index closed at 824 points; it has since tripled to its current level of 3,324.

Given enough time, the growth of the American and Singapore economy – and more importantly, the growth of the businesses listed in the respective stock markets – has made a mockery of short-term price volatility.

To borrow a phrase from Napolean Bonaparte, an investing genius (Napolean was talking about a military genius) is “the man who can do the average thing when all those around him are going crazy.” Keep this in mind when others are losing their heads about daily price movements.

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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.