You may not have noticed this, but last Tuesday (14 April 2015) was the first time since 12 December 2007 when Singapore’s market barometer, the Straits Times Index (SGX: ^STI), closed above 3,500 points. In other words, Singapore’s stock market has, without much fanfare, sneaked its way up to a seven-plus-year high. While the Straits Times Index is certainly still someway off its all-time-high-close of 3,876 points (achieved on 11 October 2007), its current level of 3,501 points is still the culmination of a six-year bull run – a run which has seen the index more than double from a…
You may not have noticed this, but last Tuesday (14 April 2015) was the first time since 12 December 2007 when Singapore’s market barometer, the Straits Times Index (SGX: ^STI), closed above 3,500 points.
In other words, Singapore’s stock market has, without much fanfare, sneaked its way up to a seven-plus-year high.
While the Straits Times Index is certainly still someway off its all-time-high-close of 3,876 points (achieved on 11 October 2007), its current level of 3,501 points is still the culmination of a six-year bull run – a run which has seen the index more than double from a bottom at 1,457 points on 9 March 2009.
Investors in the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking the Straits Times Index – would have been able to reap the rewards.
There are also many other shares which have done way better than the index’s returns since 9 March 2009. For instance, Straits Times Index constituents like United Overseas Bank Ltd (SGX: U11), DBS Group Holdings Ltd (SGX: D05), and Jardine Cycle & Carriage Ltd (SGX: C07) have seen their share prices soar by 194%, 226%, and 391% respectively from then to now.
But in happy times like these – especially in happy times like these – there’s one thing investors must do. And that is, to prepare for an ugly market crash to come.
Investment manager and prolific financial blogger Ben Carlson once wrote that “It’s easy to be a long-term investor during a bull market. Everyone’s making money and it feels like you can do no wrong. It’s when things don’t go as planned that this group loses control.”
Prevention is better than cure. And to prevent yourself from losing control, it’s best to prepare for what you would do when the markets fall.
The tricky thing about a market crash is that while one will come – it’s inevitable, really – no one really knows when.
So, in times like these, when stocks are doing okay, investors ought to start coming up with a plan to handle a market crash as they’d be in a more rational state of mind as compared to thinking about a plan when stock prices are flashing red left, right, and centre.
To that point, one important part of the plan would be coming up with a wish-list. As its name suggests, this list contains the name of shares you wish you could have bought at lower prices. The cool thing about a market crash is that it may well bring the shares you covet to levels that you’d like to buy at.
A wish-list (with the names of shares along with prices that you’d like to buy them at) can be used to help instill buying discipline during market crashes, a time when buying is one of the toughest things to do. For more on how you could come up with you own wish-list, check out here.
Another important component to a plan for handling a market crash would be to figure out the pace for deploying the cash cushion in our investment portfolios.
And for that, my colleague Morgan Housel had once shared how he would go about doing it. Morgan came up with a table (see below) after studying the U.S. stock market’s history going back to 1928. I’ve written about it in a previous article.
The table above is Morgan’s roadmap (it’s not a definite, I-must-follow-through-with-it type of plan) which would help guide his actions when it comes to deploying his cash cushion. The idea behind it, as I had written in my earlier article, is to “take the greatest advantage from crashes that are both severe, as well as historically frequent.”
Everyone’s unique personal circumstances will likely dictate the need for different types of plans, but Morgan’s table can still make for some interesting food-for-thought.
A Fool’s take
With all that said, it should be noted that I’m not saying that the market’s bound to fall soon. In fact, based on the market’s current valuation, and keeping in mind the idea that it’s beneficial for investors to buy stocks when they’re cheap, the odds are with the long-term investor.
At the SPDR STI ETF’s close last Friday, it had a trailing price-to-earnings (PE) ratio of 14.2. This compares somewhat favourably with the Straits Times Index’s long-term average PE (from 1973 to 2010) of 16.9.
But, market crashes are unpredictable in their timing – one can happen tomorrow for all we know. And even for that alone, investors may want to start thinking about how they might want to prepare for one. Right now.
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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.