Attention, Investors: This Is How Our Brains Play Tricks On Us

August was a dreadful month for stocks. Based on daily closing prices, the Straits Times Index (SGX: ^STI) had fallen by 11% from peak-to-trough in that month. The headlines were gloomy and the mood amongst investors were likely to have been sombre.

But here’s something interesting. Does anyone remember that August 2011 was even worse? In that August, which happened just a short four years ago, the Straits Times Index had fallen by an even steeper 15.4% from peak-to-trough. And, the Straits Times Index had ended August 2011 at 2,885 points, a tiny bit lower than the level of 2,921 that it was at end-August 2015.

This is how our brains tend to play tricks on us. Each time a major decline in stocks happen, we panic and ask if something has gone wrong. For investors who are more susceptible to fear, stocks may even be sold in order to tide things out. But, we soon forget that a drop has even happened… until a crash inevitably occurs again and we repeat the panic.

Here’s something else that’s interesting. I have historical data on more than 700 listed companies in Singapore’s stock market today.

Those that have pricing records stretching back to the start of August 2011 number 602. Of those, some 86 have actually experienced a compound annual growth rate of at least 10% in their share price from then to the end of August 2015. And from that group, nearly three-quarters (63 of 86 to be exact) have seen their earnings grow.

Over that period, Singapore’s stock market – as represented by the Straits Times Index – has suffered through at least two painful months (August 2011 and August 2015). There are likely many other months in which the index had experienced sharp falls. But through it all, there was still a large group of shares that had delivered very satisfying long-term gains largely as a result of their business growth.

It would have been easy to panic and worry that something had gone wrong back in August 2011 when stocks were sliding. But, the stock market was simply doing what it has always done – fluctuate. Four years on from August 2011, and we find that stocks with growing businesses had done what they had largely did historically – reward shareholders with higher share prices over the long-term.

When you’re facing a difficult time in the market, remember two things: First, remember that it’s normal for stocks to fall every now and then; Second, remember that stocks with businesses that do well will likely see their prices climb eventually and reward you (that’s provided you had purchased your shares at reasonable valuations in the first place!).

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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 company mentioned.