The Biggest Investing Tragedy of the Chinese Stock Market Rout

For most of the past year, the China-based Shanghai Stock Exchange Composite Index was the toast of the town as it rallied and took on a life of its own.

From a level of around 2,000 points in the middle of 2014, the Shanghai Stock Exchange Composite Index leapt to a peak of over 5,000 points in June this year, all the while being cheered on by the Chinese media.

But alas, it did not last. The tide quickly changed about a month ago.

From its perch, the Shanghai Stock Exchange Composite Index then proceeded to take a sharp dive which had Chinese authorities scrambling to stem the fall. At the time of writing, the index trades at around 25% lower than its June peak.

Memories of tragedies

“Stock market tragedies” like these tend to make the headlines in the financial media.

At the local front, we may not be spared as well. As my colleague Ser Jing has pointed out previously through the graph below, Singapore’s stock market benchmark, the Straits Times Index  (SGX: ^STI), has endured its own version of “tragic falls” of 25% or more in many years over the past two decades.

Maximum drawdown for Straits Times Index, 1993 - 2014

Source: S&P Capital IQ

Those “tragic falls” tend to be remembered by the general public. It may even be held up as a gruesome example to scare away aspiring investors. Some may even go on to chide the stock market as the biggest casino in the world.

The real tragedy

And yet, if we take a longer view the picture may look very different. The Foolish investor may note that the SPDR STI ETF (SGX: ES3) – an exchange traded fund that mimics the STI – has returned more than 8% per year since its inception in 11 April 2002. And this return has come despite the “tragic falls” that are shown in the chart above.

My U.S. colleague Morgan Housel once wrote:

“Everyone has heard of the crash of 1987, when the [U.S.] stock market fell more than 20% in one day. They call it Black Monday, and it will be remembered forever. But few cared about the 102% stock market surge that took place in the two years before the crash, or the 65% rally in the following two years. They don’t call it anything. There are no books written about it. But it let anyone in stocks more than double their money during this period, Black Monday and all.”

To me, the real tragedy occurs when aspiring investors are spooked out of investing for the long-term due to some of the tragic short-term stories  – the ones that not give the complete picture but yet are the ones which are often remembered – that exist.

The silent risk of inflation

On the other hand, the quiet risk of inflation does not get as much headlines.

As yet another of my fellow Fool David Kuo points out, investing can be a way to help us beat inflation over the long-term. While inflation will unlikely make the headlines, it is slowly eating away at the purchasing power of our money over time. A case to point: $100 in 2004 (just 11 years ago) that’s left under your mattress would have the buying power of $75 dollars in today’s money.

If we choose not to invest, we may have one less tool at our disposal to battle inflation.

Foolish takeaway

Big falls in the stock market may dominate the headlines, but as a Foolish investor, we should remain steadfast with a longer term view for the stocks market. As history has shown, we may increase our chances of getting a decent return the longer we keep our stocks.

For more investing analyses, insights, and important updates about Singapore's stock market, sign up for 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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.