1 Thing to Know Before the Stock Market Crashes

The Straits Times Index (SGX: ^STI) has run up quite a bit — almost 27% — from where it was early last year.

Investors who have been holding stocks over the past year are probably feeling a lot richer. But other investors might be wondering if we are enjoying too much of a good thing. After all, as history shows, the Singapore stock market has declined from time to time…

(This phenomenon is not unique to our local market, of course!)

Who is right and who is wrong? We’ll take a deeper look at that question by trying to understand the nature of market declines.

Historical odds and ends

The chart below captures the maximum peak-to-trough decline (the maximum drawdown) of the Straits Times Index in each calendar year from 1993 to 2014.

Source: S&P Global Market Intelligence

If we consider a 20% decline or more as a “market crash,” there were more than a few over the 21-year period represented in the chart above.

In fact, there were nine years where the Straits Times Index declined 20% or more! Putting it into odds, there is about a 43% chance for the Straits Times Index to decline 20% or more each year.

When you look at it that way… the odds are pretty high for a market crash in any one year.

Market crash: “When,” not “if” 

Market crashes will happen. We don’t know when. But it is not something to be feared. And look at it this way: A market decline could present us with opportunities to invest. Or as our former Fool colleague Morgan Housel puts it:

Do you see market downturns are a risk or an opportunity? My money’s on the latter.

Editor’s note: Two other things to note about market crashes have recently been shared. You can find them in here and here.

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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.