The Strait Times Index (SGX: ^STI) had entered bear market territory recently. With the index currently hovering around the 2,700 mark, it is trading around 24% below last year’s high. Bear markets can be a great time to buy stocks, but it is also a time when investors can feel plenty of confusion and fall for stock market myths. One myth that investors may do well to ignore would be this: Catching the perfect bottom is needed to invest well. Settle down, Mr. Bear Market Some believe that the stock market has to “settle down” before one can invest. To use an analogy, if…
Bear markets can be a great time to buy stocks, but it is also a time when investors can feel plenty of confusion and fall for stock market myths.
One myth that investors may do well to ignore would be this: Catching the perfect bottom is needed to invest well.
Settle down, Mr. Bear Market
Some believe that the stock market has to “settle down” before one can invest. To use an analogy, if the stock market is a falling knife, these participants are waiting for the knife to come rest on the floor. If only it were so simple.
Few might admit to it, but this behavior is similar to the act of finding the perfect bottom in the market. It’s a tempting idea to try and do so, but no investor can do it consistently.
Furthermore, missing just a few good days in the market may have severe consequences on your returns. My fellow Fool Chong Ser Jing once studied the long-term performance of the Straits Times Index and pointed this out (emphasis mine):
“Between 1 May 1992 and 18 December 2013 (the timespan I had tracked), the Straits Times Index had earned an average of 3.48% per annum; if an investor had missed [the index’s] 10 best days, his returns would become almost non-existent at 0.12%.”
There were more than 5,500 trading days between 1 May 1992 and 18 December 2013. And yet, an investor missing merely 10 of the index’s best days can be left with drastically lower returns.
Nom, nom, nom
Thing is, we do not have to live and die with investing at a single level in the market. If we concentrate all our money on just one point in time, we could well be tying our wealth to the whims of the stock market’s short-term vagaries.
It is possible to invest in stages and spread out our investment capital across time.
In doing so, we may begin to rid ourselves of the myth that one must find the perfect bottom to invest well. In doing so, we may give ourselves more time to study the businesses behind stock tickers. In doing so, we may just increase our chances of attaining satisfying long-term returns.
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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.