The fall in global stock markets has been both sharp and shocking. Some have called it a crash. Others have called it a correction, which sounds much better than a full-blown stock-market slump. But these things happen in stock markets from time to time. Over the last 50 years, we have experienced around eight of these events globally. So, as a rough rule of thumb they occur about once every six or seven years, for reasons that we can only speculate. The last one was in 2008. So, the current correction is, if anything, a little overdue. It’s not different…
The fall in global stock markets has been both sharp and shocking. Some have called it a crash. Others have called it a correction, which sounds much better than a full-blown stock-market slump.
But these things happen in stock markets from time to time. Over the last 50 years, we have experienced around eight of these events globally. So, as a rough rule of thumb they occur about once every six or seven years, for reasons that we can only speculate. The last one was in 2008. So, the current correction is, if anything, a little overdue.
It’s not different
Some reckon corrections could be due to the market’s terrible habit of getting ahead of itself, which pushes valuations to levels that could be too rich for some companies to live up to. Others reckon that it could simply be due to the behaviour of the crowds, as a trickle of investors who choose to leave the market turns into a stampede rushing for the exits.
Whatever the reason, an often-heard comment in times like this is that “this time it is different”. The inference is that the current stock market correction we are experiencing is somehow materially different to previous stock market corrections. That is certainly a possibility because no two events are ever likely to be identical.
Who’s to blame?
The correction this time around has been blamed on a slowdown in China. That has not happened in recent years, as the Middle Kingdom has been an important engine of growth for many economies around the globe for at least two decades.
Nor have we had to experience a possible withdrawal of liquidity by the US for quite a number of years, either. The last time that the US increased interest rates was in 2006. But it is important to remember that things are only ever different, if our time horizon is not long enough.
Over the long term, our Straits Times Index (SGX: ^STI) has generated a return of around 8% a year including dividends, in spite of the inevitable corrections. So, while this stock-market correction might appear to be different, history is on the side of those who are prepared to stay invested for the long haul.
Where is best?
One of the problems with ditching shares in times like this is that the money must be invested somewhere else. This means that we have to decide which of the three remaining asset classes, namely, cash, bond or property, to invest the money into. After all, there are only four asset classes that we can choose from. (Stamps, vintage cars, wines, coins and fancy Swiss watches etc… are not asset classes.)
Cash is still deeply unattractive, even though there are rumblings that some central banks might be on the cusp of normalising interest rates. Whether they do so is a moot point, given that it could take many years before interest rates will reach normal levels. Over the last three decades, interest rates in Singapore averaged 1.7%. Currently it is 0.49%. It could take a while before the Monetary Authority of Singapore raises rates to those levels again.
What about bonds?
Singapore 10-year bond yields are better than cash, but not enough to excite. There is the added worry that falling bond prices, which accompany rising interest rates, could result in a loss of capital. Of course, there is no loss of capital if the bonds are held to maturity. But where is the attraction in holding an asset that yields around 2.85%, if inflation rises?
The third possible asset class for those that choose to leave the stock market is to reinvest the money into property. Currently, gross rental yields in Singapore are around 2.8%. But that does not take into account tax, maintenance fees and others costs, which can eat into the returns.
An easier option could be Real Estate Investment Trusts or REITs. Currently, there are 28 dividend-paying REITs on the Singapore stock market that delivers a higher yield – their median yield is around 6%.
Any stock market slump can be a worry. It is never pleasant to lose money. However, it is important to bear in mind that a stock-market correction could be an opportune time to buy more of the stocks that we like at a favourable price. It should not be a time for anguish.
It is also important to remember that if we sell our shares, the money must be invested elsewhere. Consequently, it is important to work out if the “elsewhere” is likely to generate a long-term return of more than 8%, which is the kind of returns we can expect by keeping our money in the stock market, through both the ups and the unavoidable downs. I don’t think there is.
A version of this article first appeared in the Independent on Sunday.
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