The benchmark Straits Times Index dropped an incredible 127 points and fell 4.3% on Monday 24 August 2015, its biggest one day drop for close to 7 years. And looking at how the market is performing today (at the time of writing), it could be a matter of time before we break below the 2,800 mark?
I think after the massive volatility and market declines in the past few weeks, I would not be surprised if some investors are left looking like this:
I really wonder how these gifs are made. Can a cat really behave like that?
At the same time, I also know that a great many investors (including some bloggers) are hoping for a market crash that resembles the Asian Financial Crisis or even the Great Financial Crisis. That were two occasions when the market declined by ~60% from their previous peak.
As for me, I am totally prepared for a 30% or even a 40% decline in the market (another 10 to 20% decline from this point). That’s quite a manageable bear. But 60%?
By that point, the stock market would have crashed below 1,500 points and here’s 3 reasons why I am hoping that would not happen:
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1. Vested Interest: 60% of assets in equities
Nothing motivates one more than having significant skin in the game.
At this point in time, I am close to 60% invested in equities. Considering that the STI did not break its previous record of 3,800 (set in 2007) earlier in the year, my belief is that the decline wouldn’t be as extensive.
And since my actions should concur with my beliefs, if the STI reaches 2,500 points (a 30% decline from its recent peak), I should be close to 75% invested in equities by then. At 2,200 points (a 40% decline from its recent peak), probably 90% of our assets would be invested.
The strategy is something in line with the table below:
And if the market drops further from that point, I would be literally out of ammunition, considering our savings from income is negligible at this point in time. That’s not a situation I would like to find myself in.
2. Delaying Gratification Should Be Rewarded
I understand that “you only know who is swimming naked when the tide goes out”. And a big bear market will weed out people with little convictions or no staying power. Many people, including me, would argue that if you behave like a child in the stock market, you ought to be and WILL be punished. That’s how the free market works and as a participant, all of us have to bear that risk.
And yes, having the right psychology and temperament helps. However, my gut feel is that that is not the be all and end all.
As the stock market keeps on declining past a certain point, the chance of an unanticipated event like losing your job increases which might force an investor to capitulate and liquidate some stocks at a huge loss.
A big bear favours one with deep pockets. If you have $10 million and you have 10% as emergency funds, $1 million should tide you through most black swan events. However, if you only have $100,000, I can think of many possibilities whereby a $20,000 emergency fund can be wiped out quickly.
I anticipate alot of people disagreeing with me on this point. But because I am such a firm believer in frugality and delaying gratification, I believe such core values should be aptly rewarded.
If only frugal and conservative people can get a simple and stable instrument coughing out 3% dividends and 3% capital gains steadily every year.
3. Mayhem In People’s Lives
As mentioned earlier, many investors (likely with <40% invested in the market) are hoping for a big stock market crash so that they can profit immensely from the subsequent recovery. A 100% capital return or getting yields of above 10% or even up to 15% on some blue chips or REITs. In my opinion, that’s very much understandable.
However, one often underestimates the cost of a big bear on other people’s lives or maybe even his own, especially if he loses his job.
Since it’s quite difficult to dig out the impact of the 1997 AFC on the lives of common people (internet wasn’t big then), here are some from the more recent 2008 Global Financial Crisis.
a. Population could fall by 4% as foreign workers are laid off
b. Retrenched… and what to do next
Huge amount of layoffs and retrenchment. I remembered that as a tutor then, one of my students’ parents remarked that she was lucky to still have a job with one of the auditing firms. Her company also forced employees to take a day off every week with salaries correspondingly reduced.
The government also had to introduce some drastic measures like the Jobs Credit Scheme to save jobs and ensure a low unemployment rate. And impact on property market and rental rates? REITs having to issue rights after a credit crunch?
There’s no doubt a stock market crash would bring about many opportunities but beware of the potential pain?
And yes, this is what could happen to your friends/family members if they invested in stocks/property with lots of leverage.
I don’t like such sights and stories so yes, I am not hoping for a stock market crash, even though I know this won’t cut any ice with Mr Market.
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fong sui lon liu chuan. Some people profit, some people lose; Then hopefully vice versa
Hi Toad,
Hopefully, one won’t profit from another by so much that the other can never recover from the loss. I guess that was my concern.
Hi 15hrww
It is just a matter of time. Investors should manage themselves, not the stock market. The stock market is more predictable than humans.
The human element you mention is particularly powerful – Any drop in the 40-60 range will devastate society (yet again). I’m not sure I’d want to associate with anyone whose self-interest was so powerful that they desired personal gain at the cost of so much suffering.
At any rate, I’m not earning income any longer, so count me among those who definitely do not want a market crash. Does anyone want my own ER to fail? I hope not!
Hi Dr. Doom,
I am so happy to see you on my humble (and somewhat localised) blog! I actually spent the last few weeks of my previous job devouring your archives and enjoyed them tremendously.
That’s a nice way of putting it, “anyone whose self-interest was so powerful that they desired personal gain at the cost of so much suffering.” I think there are actually many out there that the above describes to a T.
I don’t think anyone would want your ER to fail but I think with your ability, you could easily take up some writing gigs as a supplement to your portfolio income. A
On a more serious note, this could also be a good episode to test out whether there is a need to allocate more bonds/cash in our portfolios.
Hi Dr Doom
Well said. However, the market up and down is not expected by any person and it follows. It is part and parcel of the cycle. If one can’t risk, don’t invest. Invest with what you are comfortable with.
Hi Frugal Daddy,
I guess you are right. If one leverages to the hilt and the market moves against him, there’s little we can do to help that person.