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The Danger of Waiting for a Market Crash Before You Invest

If you, like most investors, like to scoop up bargains in the stock market, you’d probably prefer to wait for the market to crash before investing.

But here’s the thing – that wait for a substantial crash (say a drop of 20% or more), can be harmful to your portfolio at times.

Let’s assume for instance that you were interested in vehicle inspection outfit Vicom Limited (SGX: V01) and supermarket retailer Dairy Farm International Holdings Ltd  (SGX: D01) at the start of 2006, when the duo had share prices of S$0.93 and US$3.62 respectively.

If you had a crystal ball back then and foresaw the Great Financial Crisis of 2008-09 and the 67% collapse from peak-to-trough for the Straits Times Index (SGX: ^STI) during the crisis, it’s very likely that you would have held off buying Vicom and Dairy Farm until after the crash had arrived.

But here’s the thing, Vicom had bottomed-out at around S$1.40 per share during the crisis in October 2008 while Dairy Farm did so in December the same year at a share price of US$3.90. Even at their lowest points in one of the worst economic and stock market crashes the world had seen since the Great Depression of the 1930s, both shares had higher prices than at the start of 2006.

The experience of Vicom and Dairy Farm, while admittedly being cherry-picked examples, serves to bring home the point that it does not always make sense to not invest because you’re worried about a crash.

Nobody knows when the stock market is going to fall again. So, invest based on a comparison between a share’s business value and share price and not on when you think a crash is coming. A company that’s a great bargain now might just be at a much higher price by the time the next stock market crash reaches its trough.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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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 owns shares in Vicom.