How to Deal with Stock Market Volatility

What a roller coaster ride last week was!

For context, Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI), ended at 2971 points on Friday the week before (21 August 2015). From there, the index quickly plummeted to an intraday low of 2808 on Tuesday, marking a steep decline of 5.5% against its close on 21 August 2015.

But then, something changed.

The Straits Times Index closed at around 2,956 last Friday (28 August 2015) – barely 0.5% lower compared to where it was on 21 August 2015. In other words, if you had slept through the entire episode last week, you wouldn’t have missed much.

Going long

Stock market volatility over the short-term tends to attract headlines the same way honey attracts bees. But it’s really the longer-term picture that we should focus on.

Let’s look at the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking the fundamentals of the Straits Times Index – as an example. When the Straits Times Index suffered its sharp fall last Tuesday, the SPDR STI ETF had tagged along for the ride. From a close at S$3.03 on the preceding Friday (21 August 2015), the ETF had slipped to an intra-day low of S$2.87 last Tuesday (25 August 2015), thus representing a 5.3% loss.

Such a loss may seem painful to stomach. But consider this, from the SPDR STI ETF’s inception on 11 April 2002 up till end-July 2015, it had generated an annual total return of 7.9% with dividends reinvested. That’s a rate of return which can double our money every nine years.

With that in mind, I would prefer to keep my eyes on the longer term view instead of what happens over short time spans.

Foolish summary 

To end, I would like to share a few words from the Motley Fool’s co-founder and Chief Executive Officer, Tom Gardner, which may help us to keep things in perspective:

“When all is said and done, none of us will remember how our money did on any given day. We’ll even have trouble remembering our performance in any given year. But from saving methodically and investing avidly, the odds are very high we’ll have increasing levels of financial independence such that we can live our days freely as we choose.”

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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.