Be A Better Investor: Stocks Are Down, But Don’t Feel Down

The Straits Times Index (SGX: ^STI) is currently sitting in bear market territory.

From its peak in April last year, the index is down by 27% as of its close today. This represents bear market territory, which is defined as a market in which stocks are 20% lower from a recent high. For some, bear markets can feel like a slow water torture, therefore it is critical to keep our wits about us.

To help you be a better investor, here are two key thoughts about bear markets:

1. You’re not walking alone

According to a recent report from bourse operator Singapore Exchange Limited  (SGX: S68), only seven out of the 30 component stocks in the Straits Times Index had recorded positive total returns in 2015.

Of the seven, SATS Ltd (SGX: S58)ComfortDelgro Corporation Ltd (SGX: C52) and Hongkong Land Holdings Limited (SGX: H78) were the only ones that recorded double-digit returns.

As you can tell, losers had vastly outnumbered the winners in the Straits Times Index last year. If this is any indication of the broader Singapore stock market, more than three quarters of stocks may be sitting on negative returns. So, if your own portfolio is in the red, you are not alone.

It is important to remember that the 27% decline the Straits Times Index has experienced – measured from April last year – has occurred over a 10 month period. This is hardly a sufficient time to measure your returns. In the short run, your stocks are likely to be influenced by fickle market sentiment. In the long run, it is the business performance of your stocks which may matter more.

To be a better investor, focus on the business performance instead.

2. History may be on your side

A 27% decline can feel depressing.

It may even feel like the stock market has further to fall. History can guide us here. Take a look at the chart below which captures the maximum peak-to-trough decline (the maximum drawdown) of the Straits Times Index in each calendar year from 1993 to 2014.

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

As you can see, a 30% maximum drawdown in the Straits Times Index is a fairly rare event. This has happened in five out of the 21 years shown above. The rarity of an event does not mean it cannot happen again, but it gives us perspective on how often such a scenario occurs.

To be a better investor, we may want to take advantage of such events.

One way would be to buy stocks in stages. This helps us pace ourselves and spread out our investments over time. Instead of focusing on the market bottom, a steady investing pace allows us to participate at our own terms. Like bear markets in the past, this downturn may end one day.

And if it does, we may stand to profit from the upturn if we have been investing regularly.

If you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

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 Hongkong Land Holdings.