2 Things to Know Before the Stock Market Crashes

Credit: Fool Editorial Photos

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 dropped 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 by trying to understand why market declines.

1. Historical odds and ends – click here

2. The Oracle of Omaha speaks

In my previous article, I talked about a 43% probability that Strait Times Index will experience a 20% decline or more in any single year. Here’s the chart again:

Source: S&P Global Market Intelligence

Of course, you don’t need me to tell you that there can be a huge difference between probabilities and reality.

If you look at the chart above, you will see that there were three consecutive years, between 2000 and 2002, when the Straits Times Index declined by 20% or more. On the flip side, there were five consecutive years, between 2003 and 2007, when a 20% decline did not happen at all.

In other words, the odds might seem high, but predicting when the stock market will fall is another matter. Don’t take my word for it, just read what Warren Buffett had to say in his latest letter to Berkshire Hathaway shareholders:

“Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie [Buffett’s business partner], not economists, not the media.”

To me, Buffett’s message is pretty clear.

We should expect that market declines will happen. In fact, it is part and parcel of being an investor for the long term.

Predicting when crashes will occur is another matter altogether. Even Buffett, who is considered one of the best investors of our generation, admits that he doesn’t know.

I don’t think anyone else can, either.

Market crash: “When,” not “if” 

Market crashes will happen. We don’t know when. But it is not something to be afraid of. 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 as a risk or an opportunity? My money’s on the latter.

Editor’s note: One other thing to note about market crashes was recently shared. You can find it 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.