1 Important Thing to Remember As the Market Falls

Make no mistake about it: Singapore’s stock market has been taken to the cleaners over the past few weeks.

At the time of writing (9:41 am), Singapore’s market benchmark, the Straits Times Index (SGX: ^STI), is sitting at 2,894 points, down 2.6% from last Friday’s close.

If the index fails to recover its loss today before the end of the trading session, it’d mark six consecutive episodes of daily declines. At the Straits Times Index’s present level, it’s also a painful 18.5% lower than its 52-week high of 3,550 that was reached just four months ago in April.

The un-importance of short-term market declines

Short-term declines like what the market’s going through right now may not faze long-term investors who know where to look. To borrow an analogy from Ralph Wanger, a U.S-based fund manager with a phenomenal multi-decade track record, think of the stock market as a puppy that’s being walked by its owner.

The owner (the stock market’s underlying businesses) is taking a long, slow walk from one end of East Coast Park to the other. Along the entire journey, the excited puppy is scampering all over the place, sniffing at the grass and barking at other dogs.

But while the puppy is certainly not moving in a predictable fashion (you have no idea where it will be at any one point in time), you know for sure that the puppy will end up at the opposite end of East Coast Park from where it started eventually and at nearly the same time as its owner.

Using this analogy, short-term market declines (the puppy’s erratic runs) tend to lose significance when pitted against the collective growth of the businesses that underlie the stock market (the owner’s relaxed walk).

The disconnect between stocks and the economy

With the stock market’s recent sharp declines however, there may be some who fear that it’s a sign of upcoming troubles to the business environment and economy of Singapore. In other words, the owner may be injured – he can’t continue his walk.

But here’s the thing (and it’s important to keep this in mind): The stock market can fall for no rhyme or reason even with the economy being healthy.

The following’s a tweet from portfolio manager Ben Carlson showing the occasions when stocks in the U.S. slipped even when there was no recession. In Carlson’s words, “sometimes stocks just fall.”

Singapore’s stock market is certainly not the same as that of the U.S. But, the realm of investing is heavily governed by human psychology and that’s an area where huge commonalities can be found even amongst people from disparate cultures and nationalities.

As such, there’s a lot we Singaporeans can learn from taking a long look at the history of the financial markets even if they come from foreign shores.

A Fool’s take

It’s not easy to stomach falling share prices – nobody likes to see them. But it’s worth noting that it’s normal for stocks to take a breather every now and then. In fact, market crashes inevitably happen from time to time although no one knows when they’d happen.

Knowing all that you’ve seen in this article may not help to ease the pain. But hopefully, they can help in keeping you calm. The French military leader Napoleon Bonaparte defines a military genius as the man who can do the average thing when everyone else around him is going crazy. It’s the same with investing.

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 company mentioned.