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Fascinating Facts about Market Crashes

The last time Singapore’s market had a big fall in a calendar year was back in 2011 when it fell by 23% from peak-to-trough between January and October.

Are we due for another big one soon? Can the economy tell us anything about what’s going to happen to the market? In answering these questions, there are fascinating facts about market crashes which would be revealed.

The stock market and the economy

Let’s deal with the second question first. There’s a much richer market history in the U.S. as compared to Singapore, so let’s look at what the States can tell us.

Source: Morgan Housel, Fool.com

Some of you might be surprised by this, but changes to the economy have in fact, very little to tell us about what shares might do over the long-term. As you can see in the chart above, even big and seemingly important economic data like U.S. government debt to GDP (gross domestic product) ratios and U.S. GDP growth trends have very poor predictability when it comes to long-term market returns there.

In addition, there have been many times when the U.S. markets have corrected or crashed even when there was simply no recession in the country taking place at that time. As Ben Carlson said in the tweet below, “sometimes stocks just fall.”

Sure, there are big differences between Singapore and U.S.A. - but when it comes to the financial markets, where human psychology (which has huge commonalities between peoples from different societies) has a towering presence in how affairs play out, there’s a lot we Singaporeans can learn from a long look back at history even from foreign shores.

The big market crash

Coming to the first question of “are we due for another big crash soon,” the truth is that no one knows. But, here’s some incredible food for thought, courtesy of The Motley Fool writer Morgan Housel, when it comes to how investors might want to approach a market crash:

“The psuedoanonymous blogger Jesse Livermore asked a smart question this year: Would you rather stocks soared 200%, or fell 66% and stayed there forever? Literally, never recovering.

If you’re a long-term investor, the second option is actually more lucrative.

That’s because so much of the market’s long-term returns come from reinvesting dividends. When share prices fall, dividend yields rise, and the compounding effect of reinvesting dividends becomes more powerful. After 30 years, the plunge-and-no-recovery scenario beats out boom-and-normal-growth market by a quarter of a percentage point per year.”

On that note, the following are some excerpts about a fascinating discovery made by Motley Fool Singapore writer Chong Ser Jing, on just how safe corporate dividends can be even in the worst of times:

In Singapore, the Great Financial Crisis of 2007-09 caused the Straits Times Index to fall by more than two-thirds from peak-to-trough. But when it comes to the dividends the current index constituents were dishing out, the decline was far less severe (as seen in the table below). Some of the blue chips, such as Oversea-Chinese Banking Corp. Limited(SGX: O39), Jardine Cycle & Carriage Limited(SGX: C07), and Hongkong Land Holdings Limited(SGX: H78), managed to maintain or even grow their dividends throughout that episode.

Source: S&P Capital IQ”

Foolish Bottom Line

So to sum up what’s in here, some fascinating facts about market crashes are that 1) they can have almost nothing to do with what the economy does; and 2) market crashes - and permanent ones at that - can really be a good thing because the power of reinvesting dividends is breath-taking.

Keep these in mind if Singapore’s market ever enters a big decline. More importantly, don’t panic. Click here now for a FREE subscription to The Motley Fool’s weekly investing newsletter Take Stock Singapore. 

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