Hello Mr. Bear Market, I Have Been Expecting You…

This is to be expected… the Straits Times Index (SGX: ^STI) closed at 2,730 points yesterday, falling some 23% lower from an April 2015 high of 3,550 and placing our local stock market firmly in bear market territory.

Okay – did I really see the big bear coming in the first few days of 2016? No, of course not. But the thing is, if we look back at the history of Singapore’s stock market, we shouldn’t be surprised that a bear market can happen. 20% declines from a recent peak (the threshold for a bear market) in the Singapore market are fairly common.

Mr. Bear Market is a frequent visitor

The graph below shows the Straits Times Index’s maximum peak-to-trough decline (this is the maximum drawdown) in each calendar year from 1993 to 2014.

Maximum drawdown for Straits Times Index, 1993 - 2014
Source: S&P Capital IQ  

Of the 21 years covered in the chart above, we have seen maximum drawdowns of 20% or more in nine years. So like I said, bear markets can be a common sight.

Now, it is unlikely that we will be able to tell when a market crash will happen. But, we can still accept that stock market crashes are part and parcel of investing. And that’s the key – when we do so, we might then be able to prepare ourselves differently (and dare I say, better).

What sort of preparation are we talking about here you might ask.

Preparing a watchlist of companies we would like to buy when the market tanks would be one of the actions we can take. It pays to be ready to buy ahead of time. Going into a Christmas sale without a shopping list may lead to you purchasing things which you do not need.

Keeping a cash cushion might be another action we can adopt. Having cash on hand when a bear market arrives may enable us to pick up bargains that appear.

As an example, I was able to pick up units of Parkway Life REIT (SGX: C2PU), a real estate investment trust (REIT) specializing in healthcare properties, during the Global Financial Crisis of 2008-09. The low price I got for Parkway Life REIT currently produces a double-digit yield on my initial cost basis.

With some preparation, bear markets do not have to be a scary event, but rather an event that is welcomed from time to time.

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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 owns shares in Parkway Life REIT.