Earlier today, The Straits Times had reported on a Manulife survey regarding where investors are planning to invest for the rest of 2015. I stopped reading after the first paragraph, which went: “After the roller-coaster ride financial markets went on towards the end of 2014, a big chunk of Singapore investors are planning to play it safe this year and keep their money in cash, according to an online poll by financial service firm Manulife released on Friday.” I stopped because I saw the use of the word “roller-coaster” and was compelled to write what you’re reading now as…
Earlier today, The Straits Times had reported on a Manulife survey regarding where investors are planning to invest for the rest of 2015. I stopped reading after the first paragraph, which went:
“After the roller-coaster ride financial markets went on towards the end of 2014, a big chunk of Singapore investors are planning to play it safe this year and keep their money in cash, according to an online poll by financial service firm Manulife released on Friday.”
I stopped because I saw the use of the word “roller-coaster” and was compelled to write what you’re reading now as I think it’s incredibly important to clear any misconceptions that I see people have regarding the stock market (it’s important because misconceptions can negatively affect the way investors invest!).
With the Manulife survey, I see two huge misconceptions: 1) the false view that 2014 was a “roller -coaster” for the stock market; and 2) that volatility is to be feared.
Let’s get going.
Clearing the air about volatility
To say that 2014 – or more specifically, the end of 2014 – was volatile for the stock market would be quite a wild stretch. Why? Take a look at the chart below, which plots the number of days in each calendar year where the Straits Times Index (SGX: ^STI) has gained or lost more than 1%.
Source: S&P Capital IQ
For the whole of 2014, the number of “1% days had been just 20; and that’s a far cry from the 1993-to-2014 average of 75 “1%” days. If I were to be more specific, and look at just the fourth quarter of 2014, there were only 10 “1%” days; that’s an anualised figure of just 40 “1%” days, which is still a long way from the long-term average of 75. How’s that for the “roller-coaster”?
In fact, if we lengthen our time horizons just a little and look at how Singapore’s stock market had performed on a yearly basis, 2014 would have been a decent year with the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks Singapore’s market benchmark the Straits Times Index (SGX: ^STI) – gaining 9.17% with dividends reinvested.
That return is actually even a shade better than the SPDR STI ETF’s long-term annualised total return of 8.44% (with dividends reinvested) stretching all the way back to 2002.
With that, I move on to the second misconception.
Volatility is nothing to fear
Look at the chart below, which shows you the distribution of annual returns for the Straits Times Index in each calendar year from 1988 to 2013.
Source: S&P Capital IQ
As you can see, in those 26 full calendar years under study, there have been four years where the index actually lost 20% or more in a year. That’s on top of an additional three years where the index had lost between 10% and 20%. It’s really volatility at its best
But, a broader perspective would show that despite such volatility, the Straits Times Index has still more than quadrupled from 834 points at the start of 1988 to more than 3,400 today. In other words, the supposedly scary effects of volatility melt away with time.
My colleague Morgan Housel once wrote that “People would be less scared of volatility if they knew how common it was.” I think that’s very true.
So, here are some incredibly useful stats: In the U.S., going back close to 90 years to 1928, stocks have crashed by 10% on average once every 11 months; 20% once every four years; and 50% every two to three times per century. And how have American stocks done? They’ve gone up more than 10,000% since 1928.
Volatility isn’t something to be feared. It’s really just part and parcel of the game. The fact that stocks do crash once in a while is not an indication that something is broken; it’s just a phenomena that is as natural as night follows day.
A Fool’s take
Jeremy Siegel, a finance professor from Wharton, once said, “volatility scares enough people out of the market to generate superior returns for those who stay in.” You know which camp I’d be in. See you on the roller-coaster.
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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.