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Why You Shouldn’t Fear Record Highs in the Stock Market

If ever anyone tried to find a phrase which would illicit the most amount of fear amongst investors, my bet would be on “the market’s at a record high” being it.

The phrase brings with it the impression that a big fall’s imminent. But, that can be an irrational fear.

With Singapore’s market barometer, the Straits Times Index (SGX: ^STI), closing above 3,500 points last week for the first time since December 2007, this topic – why a market high need not be feared – seems timely to discuss.

So, here’re two good reasons why investors in Singapore shouldn’t be afraid of investing even when the market reaches new peaks (or breaks long-term price records).

1. Market highs should be feared if and when the stock market’s ridiculously expensive – like how Japan’s Nikkei index was back in the late 1980s and early 1990s. At its peak of more of than 38,900 points at the end of 1989, the Nikkei was valued at more than 100 times its earnings; that’s an absurd valuation.

And true enough, the market eventually sobered up – the Nikkei’s at a level of 20,000 today, nearly half where it was at the end of 1989.

With this in mind, where are we with the Straits Times Index now? The SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks the fundamentals of the Straits Times Index – has a trailing PE ratio of 14 at the moment. For some perspective, the Straits Times Index has had a long-term average price-to-earnings (PE) ratio of 16.9 for the period stretching from 1973 to 2010.

Sure, we’re nowhere near dirt-cheap at the moment. But, there’s still no way anyone can point at the Straits Times Index now and say that it’s crazily expensive.

2. Record highs are actually a natural thing for assets like stocks. Here’s how Bill Nygren, co-manager of the Oakmark Fund, describes it in an interview with Marketwatch:

“When you have an asset class like equities which you can expect to offer positive rates of return, it’s not that odd that we’re at record highs.”

Enroute to its current level of 3,500 points from a base of 834 in 1988, the Straits Times Index had to pierce multiple record highs along the way.

Also, for businesses that can continue to grow, one can expect their shares to be making new all-time highs, all the time. Take Vicom Ltd (SGX: V01) and Raffles Medical Group Ltd (SGX: R01) as examples. As their profits climbed over the years, so did their shares. You can see these in the charts below:

Vicom and Raffles Medical's Earnings Per Share (EPS) Growth from 2004 to 2014

Vicom and Raffles Medical share price growth from January 2004 to April 2015

Sources: S&P Capital IQ

So, if you think that the businesses that are listed in Singapore will, in aggregate, steadily and continually grow their profits over time, there’s no reason to fear a record high (if stocks aren’t ridiculously over-priced to begin with, that is).

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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 and Raffles Medical.