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1 Hidden Great Advantage For Investors That Falling Stocks Bring

Credit: andrechinn

It isn’t fun to see your stocks fall. And boy, have they fallen in Singapore. Since hitting a 2015-peak last April, Singapore’s market bellwether, the Straits Times Index (SGX: ^STI), is currently down by 27%.

Over the same period, some blue chip stocks – the 30 companies that make up the Straits Times Index – have suffered even bigger declines for a variety of possible reasons. Commodities trader Noble Group Limited (SGX: N21) is down by 69% after having seen slumping commodity prices, investors criticise certain aspects of its business and accounting, and the surface of worries about its balance sheet and credit strength.

Meanwhile, rig-builders like Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51) have slid by 49% and 58%, respectively. The price of oil, which has crashed from over US$100 per barrel in mid-2014 to around US$30 at the moment, have dragged down both firms with it.

I could give more such examples for blue chips as well as stocks that are outside the index. But, you get the drift.

Thing is, apart from the obvious benefit that lower stock prices allow investors to well, invest at a lower price, there is a hidden advantage to the current situation for investors. The advantage is illustrated by a tweet sent out last Friday by Motley Fool Funds:

 Last Friday, the S&P 500 in the U.S. closed at 1,880 points, which represented drops of 8% in 2016 and 12% from a 52-week high. So as you can see, stocks in the U.S. have made obvious and sharp declines too. The tweet above by Motley Fool Funds pointed out how current conditions in the U.S. – and the associated feelings an investor may have about stocks at the moment – is a good indication of the investor’s risk tolerance.

This is an important point for us to note here in Singapore too. When market conditions are good, it can be common to hear of investors saying ‘I’d be a buyer when stocks fall.’ But as the boxing legend Mike Tyson was believed to have said, “Everyone has a plan until they get punched in the mouth.” The fear that comes with falling stock prices may easily paralyse investors into inaction, or worse, cause poor investing behaviour.

Humans tend to suffer from a cognitive bias known as the empathy gap. What this means is a person tends to have trouble imagining how he (or she; this affects both males and females) will act in a ‘hot’ emotional state – such as fear and anger, for example – if he is currently in a ‘cold’ emotional state. This has strong links to investing – saying we’d invest when stocks fall during times of calm market conditions can feel very different from actually investing when stocks do fall, like now.

The current market malaise has given us the gift of being aware of our own emotions when confronted with falling stocks. Having awareness can’t rid us of our feelings, but what it can do is help us plan ways to circumvent any potentially destructive investing behaviour.

I’d also suggest that you at least consider recording a journal of your own emotions now, so that when similar market declines happen in the future, you can be more prepared for the turmoil that may go on inside your own stomach. Don’t let the current market decline go to waste.

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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 companies mentioned.