Is The Stock Market Crashing Soon?

Is it just me or does 2015 feel like 2008?

The price of oil had peaked at nearly US$150 per barrel. Soon after, it fell dramatically over the space of a few months to less than US$60. You might think that I am describing how the price of oil had changed in late 2014. But, I was actually writing about the oil-crash in 2008.

And soon after the price of oil crashed in 2008, stock markets around the world began their own terrible descent. That period is now well-documented as the Global Financial Crisis.

That’s not the only similarity between 2008 and 2015. In 2008, many western banks had faced major challenges due to the sub-prime crisis. In this year’s version, we have many Chinese banks facing the risk of rising non-performing loans.

So, are we heading towards yet another financial crisis? What does it mean for our investments?

No one has the crystal ball

The truth is no one has a working crystal ball – and I don’t think anyone will ever have it either.

Even “experts” like Nouriel Roubini, who actually predicted the market crash in 2008, do not possess clairvoyance. This is why: Roubini has made bearish comments about the U.S. stock market for many years (in at least 2006, 2007, 2008, 2009, 2010, 2011, 2012, and 2013) and he was only right once. The U.S. stock market is today much higher than where it was back in 2006, 2007, or 2008 for the matter.

Why should we put our time and energy into something which we do not have any control over? Instead, our time might be better spent finding good individual companies that could continue to perform well regardless of how the short-term economy is doing.

Back to basics

Understanding what makes for a good business might be the key to long-term investing success. For companies that have viable long-term business models, the timing of when we invest in them can become secondary.

Let’s take Singapore Telecommunications Limited  (SGX: Z74) as an example. Investing in Singtel back in October 2007 would seem like a mistake given that the month was when Singapore’s stock market peaked before the Global Financial Crisis. But, if you had reinvested your dividends from Singtel, you will be sitting on a neat profit of around 40% on your invested capital today.

Real estate fund manager ARA Asset Management Limited (SGX: D1R) is another good instance. Even if you had invested in ARA during the market’s peak in October 2007, you would still have doubled your investment today if your dividends were reinvested. This comes after the company had seen its share price drop by a third this year.

So with returns like these, why should we be worried about market crashes over the short-term if we have chosen our investments wisely 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 contributor Stanley Lim owns ARA Asset Management Ltd.