Singapore's Straits Times Index Down 2.6% Amid Wuhan Virus Scare
As far as the stock market is concerned, it looks like it hasn’t been a great start to the Year of the Rat.
As of the time of writing on Tuesday (28 January), Singapore’s Straits Times Index is down 2.6%, or 84 points, to 3,156.2.
Market participants are spooked by the Wuhan coronavirus, which has already claimed 106 lives, with more than 4,000 cases confirmed in China. As of 27 January, Singapore confirmed its fifth case while 57 cases are pending test results.
Amid all the scare, what should Singapore investors do, or shouldn’t do?
Market’s Doing Its Thing
Firstly, we should keep our cool and realise that stocks are inherently volatile.
From 1993 to 2017, there were a total of 6,411 trading days, and the Straits Times Index more than doubled, without dividends.
During that period, there were 870 days when the index lost 1% or more, 242 days with a loss of more than 2%, and 90 days when the daily decline exceeded 3%.
From what we can see, the stock market throws a tantrum from time to time, and right now could be a similar situation where the stock market is doing its thing.
However, when sanity comes back, history has shown that stocks do recover.
Sell Now To Buy Later?
Since stocks will recover, doesn’t it make sense to sell all our shares and buy them later when the stock market is on an uptrend again?
Logically, it sounds simple to cut our losses and sit on cash, waiting for things to become better.
The problem is, we can never know when the recovery will happen. And we are incurring unnecessary commissions when we trade in and out of the stock market.
During the SARS period, the Straits Times Index staged its recovery way before the World Health Organisation declared the SARS outbreak contained worldwide.
Many studies have also shown that market timing doesn’t work.
For example, one study by Index Fund Advisors showed that for a 20-year period from 1994 to 2013, the S&P 500 index of the US averaged an annual return of 9.2%.
A $10,000 initial investment would have given around $58,000 at the end of 2013.
However, if an investor had missed out on only the 10 best days of the 20 years, the average return would have fallen to 5.5%, meaning the final investment amount would only be halved at about $29,000.
That’s a sizeable amount.
Pioneer of index funds, the late John Bogle, once said the following on market timing:
“Sure, it’d be great to get out of stocks at the high and jump back in at the low… [but] in 55 years in the business, I not only have never met anybody who knew how to do it, I’ve never met anybody who had met anybody who knew how to do it.”
Therefore, it doesn’t pay to time the market; time in the market is more important.
What we should do instead of cutting losses is first to ensure we have invested in strong businesses which will stand the test of time and then stay the course.
If the companies we own have a history of paying consistent dividends, then there’s added incentive to hold on to the shares as we can, based on probability, collect some dividends while waiting for the stock prices to recover.
In fact, if the reason to own the business hasn’t changed, any fall in share price should encourage us to buy more of the company’s shares.
World-famous investor, Warren Buffett, taught us one of the most powerful investing lessons in his 1997 letter to Berkshire Hathaway shareholders:
“A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
Many of us might be looking to grow our wealth through the stock market over the long-term.
Short-term declines like now create a great situation to buy shares on the cheap, provided the reasons we had bought stocks in the first place still hold true.
Having said that, if the fundamentals of the company has changed during the period of the Wuhan virus, and its share price is consequently falling, it would then make sense to sell its shares, as the business may never recover.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.