1 Simple Chart To Help You Remain Calm In A Volatile Stock Market

Right now, Singapore’s stock market is in a world of pain. The market barometer, the Straits Times Index (SGX: ^STI), has fallen by 25% since hitting a 52-week high of 3,550 points on 16 April 2015. Some 347 shares in Singapore have declined by that amount or more over the same period, according to data from S&P Global Market Intelligence.

Given such volatility, I understand how tough it can be to remain calm if you’re an investor. So, here’s a simple chart from Yale University economics professor, Robert Shiller, which I think can help soothe some fraying nerves:

Robert Shiller's rational and irrational stock price chart

The chart uses over 100 years of historical data from the S&P 500, a broad U.S. stock market index. It plots how the index has actually performed from 1871 to 1979 (the solid black line) and compares it to how the index should have performed in that timeframe if investors had hindsight knowledge of how the dividends of the S&P500 had changed (the dashed line).

What it shows is fascinating. Whereas stock prices in the U.S. had swung wildly from time to time over that 108 year period, the actual fundamentals of businesses there – as represented by dividends – had changed in a much less violent way.

The chart’s great as a calming tool during stock market downturns because it can act as a strong reminder that falling stock prices need not necessarily mean that the fundamentals of businesses have deteriorated significantly. And as a reminder, it is the business fundamentals of stocks which ultimately drive their returns over the long-term.

Shiller’s chart is an apt pictorial representation of something investor Eddy Elfenbein once said:

“This is a fact that all individual investors should understand when they invest: Each day the S&P 500’s intrinsic value rises by about 1/30th of 1% — a tiny, tiny amount. But the average daily swing on the market is about … I mean it’s come down recently, but historically it’s been about 1%. So think about that: Each day on average you’re swinging 30 times what the market is actually worth, what the actual intrinsic value is.”

Changes in stock prices over the short-term often do not reflect the real change in the values of businesses. When you can internalise this, a volatile stock market may just become a less frustrating and panic-inducing thing.

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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.