The Great Singapore Sale is Here
The true investor welcomes volatility ... a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.
— Warren Buffett
Stock prices in markets around the world have been fluctuating dramatically for the past two months or so. The positive story of a world economy opening up after an extended and enforced COVID-19 lock down has now been replaced by negative news of high inflation, rising interest rates and a possible recession on the horizon. It is no surprise that many investors are feeling worried, trying to predict what to do next, repositioning their investments, which immediately further contributes to the situation of high volatility.
Based on the closing prices on 19 May, global stocks are down around -15%, US, Emerging Market and Asian stocks all around -18%. Nasdaq stocks which represent large technology names is down even more at -26% and some of the high growth companies which were the darlings of investors during COVID-19 are doing even worse with some at -50% or more.
The Conundrum of What to Do
Investment professionals and financial news generally define a decline of -10% or more as a “correction”, and a decline of -20% or more as a “bear market”. However it is unclear to investors what they should do with this information. Should they protect themselves from further losses by selling? Should they be looking to buy more stocks at such favourable discounts? When is the best time to do so? After all, there are other strange terms being bandied about now such as “catching a falling knife” and “dead cat bounce”. What does this all mean?
Based on the tables shown below, US stocks from 1926 to 2015 have had “corrections” of -10% or more 28 times in the past. Global developed market stocks have had such -10% declines 9 times from 2001 to 2015. Emerging market stocks has had 15 “corrections” since 1999. Among these, there were occasions where the -10% decline avalanched into a -20% loss or more. As a result, many investors feel that they can protect their money well by selling early when losses still remain small. The issue now is when to do it. Sell when markets hit -10%? What about -9% or -11%? Which number gives the best outcome? After selling, when do you buy in? When markets hit -20%? What if it goes to -30%? You should have waited a little while longer no? What if it never touches -20%, at which level do you re-enter, at -18% or -16%? You’ll need to constantly monitor what is happening in the markets every day on the hour.
Making Things Simple
Here is a simple thought process for how to endure a sell-off. If you are already invested, leave it alone. If you have spare dry powder at the side, or spare cash on hand, then any correction is an excellent opportunity for you to make more money from the market than in normal situations. Like Warren Buffett’s quote, you can buy excellent businesses at depressed prices when prices are fluctuating wildly. It’s the Great Singapore Sale! You can see that if you invest in US stocks once the declines reach -5% or -10%, your future returns over the next 1, 3 and 5 years will be very good.
Declines are defined as periods with consecutive days of negative index returns with cumulative losses at or above the cutoff. Annualized compound returns are averages across all declines. US Large Cap is the S&P 500 Index, provided by Standard & Poor’s Index Services Group. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
If you are wondering if it is peculiar only to the US market, this concept also applies to global developed markets as well.
Declines are defined as periods with consecutive days of negative index returns with cumulative losses at or above the cutoff. Annualized compound returns are averages across all declines. International Large Cap is the MSCI World ex USA Index. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
And works equally well for emerging markets too.
Declines are defined as periods with consecutive days of negative index returns with cumulative losses at or above the cutoff. Annualized compound returns are averages across all declines. Emerging Markets is the MSCI Emerging Markets Index. MSCI data © MSCI 2014, all rights reserved. Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Dramatic and volatile changes in market prices are not a sign that the financial system is broken but rather what we would expect to see if markets are working properly. The world is an uncertain place. The role of securities markets is to reflect new developments— both positive and negative—in security prices as quickly as possible. High inflation, halt of Russian gas, global supply chain issues, Federal Reserve hiking interest rates, MAS changing the appreciation band of the SGD; these events are quickly “priced in” and reflected quickly.
If you are still worried about a large sell-off, take some comfort from how markets have worked over all these years. A correction or bear market is painful no doubt, but is only temporary and short lived. The bull market - or the period where securities reward a long-term investor go on for very much longer (see chart below).
Source: GYC, Global Stock Data from MSCI World Index. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
Investors who accept dramatic price fluctuations as a characteristic of liquid markets may have a distinct advantage over those who are easily frightened or confused by day-to-day events and are more likely to achieve long run investing success. However, if you still feel confused or concerned about your investments, come and chat with our advisory team.
