Markets have been taking a beating these couple of days so I thought I’d do a post on where it stands right now and what should you do.

As of today’s (21 Aug 2013) close, the STI has given up all its gains and then some (from 3201.74 on 2 Jan to 3108.99 today). From its peak of 3454.37 on 22 May 2013, the STI is now down 10%. Now, that’s halfway to bear market territory and significant but not anywhere near the horrors of 08/09. See TRB’s take on what that means.

Josh Brown's take on what the dips mean (souce: The Reformed Broker)

Josh Brown’s take on what the dips mean (souce: The Reformed Broker)

Valuation-wise, where do we stand?

Well, on a PE10 basis, the STI stands at 14.08, not bargain territory but certainly not a level that should make us worry about being terribly overvalued. For the record, the last 3 times we were at 14x PE10, the market returned 20.6%, 21.1% and 54.9% over the next one year. That was if you had bought the STI in June ’12, Jan ’12 and Apr ’09 respectively and held it for a period of one year (which in my book is too short a holding period!). This isn’t to say that you would definitely get the same returns (the stock market and economy is a far too complex creature to make definite predictions) but I would say that the odds are in your favour as far as valuations are concerned.

Personally, I haven’t been buying anything since mid-June. Even then, it was a nibble predicated on a dip. I will definitely be putting some cash to work given that my cash levels are up to 30-40% in some of my portfolios due to the building of my cash hoard from savings as well as dividend inflows.

As always, I’m going to be selective and bargain hunt in the sectors that have been trashed. So what should you do? Well, it depends. If you’re a young investor with a regular stream of income, this would be as good as any other time to pick up some good businesses and/or start to build your portfolio.

If you’re a highly leveraged ‘investor’ (read: Trader/day trader) who is long, then woe be to you.

PS: I’m aware of Jeremy Siegel’s criticism of the PE10 (CAPE) but that’s another thing for another time.

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