Had you invested in the STI in 1988 at $908.9, you would have made slightly more than three times your money by now, excluding dividends. You would probably have made five to six times your money if you include dividends (based on statistical analysis of past returns).
Historical price of the Straits Times Index on January 2nd from 1988 to 2017
Over a 30-year period, you could grow your money by SIX times! Now isn’t that great? The best of all is, you do not have to do anything other than just putting your money in STI, and reinvest your dividends back into it for 30 years. This sounds easy, but it really is very tough.
For starters, we are all emotional creatures. We love happiness and hate sadness. When the STI price goes up, it makes all of us feel happy, and we love it! Often, we start regretting not putting more initially, and might even put more money in now that it has gone up. On the other hand, when the price goes down, we feel sad. We start complaining about everything – your broker, your spouse, your kids, the government, anything related or unrelated to the price movement. Then we panicked, we start to fear that the stock might drop further, and so we sell the shares first to prevent further losses. We successfully turn a paper-loss into a real loss. We also fall into the trap of ‘buying high and selling low’.
Warren Buffett, the world’s greatest investor, often say that as an investor, we should be ‘greedy when others are fearful, be fearful when others are greedy’. This is against human nature and hence hard to do it. But if you can do it, you buy when the price drop, sell when it gets too high, you are guaranteed to make money – DUH.
Looking back at the STI price, you might ask ‘how can anyone lose money if the market keeps going up?’ Well, because these people trade in and out, thinking that they are the Einstein of the stock market, thinking that they can predict when the market goes up and down when even the experts cannot accurately predict when such events happen.
To make easy money in the stock market over the long-term, is simply to invest and stay invested! Set yourself a target to invest $100 every month into investing in an index fund like STI. Regardless of the price, invest that same $100 every month – unless of course you see a big drop (like 10%), which is a great buying opportunity, in which case I suggest you add a ‘0’ behind and make it $1,000.
On a year by year basis, you have a slightly more than 40% chance of losing money in the stock market. There is also a 28% chance you might experience a loss of more than 10% in the market.
However, if you look at it over a 5-year rolling period, it decreases to slightly less than 40%. More importantly, the magnitude of loss is reduced to less than 10%. This is a significant drop in potential loss as compared to year-on-year results.
Stretch it over 10 years, the probability of you losing money in the stock market drops to less than 30%.
You can spot 2 trends from these data.
1) The longer you stay invested, the higher probability of you making money from the stock market and the lower the probability of you losing money in the stock market.
2) The longer you stay invested, the more likely you are going to get the average market returns you deserve. Average is not a bad thing in this case, considering that most experts fund managers in the fund tend to perform below-average over the long-term (some even over the short-term).
The stock market is not as complicated as it seems. You can make money from it! The thing to remember is to invest and not speculate. When you buy a HDB, you do not go around asking for a price on your HDB every day, and sell the minute you can make a few thousand from it. Instead, you own it for tens of years and sell it later, when the returns can be tens or hundreds of thousands. The same thing can be applied to the stock market. Invest for the long-term and you will reap the rewards.