So, equity markets around the world were hit pretty bad on Monday and Tuesday. Even the cryptocurrencies were hit pretty bad*. As I write this, the STI is down about 6.5% from its most recent peak.

However, a colleague of mine who’s been on the sidelines, and totally missed the upward march in the stock market, got really excited. His worry will be that markets don’t go down far enough for him to get completely in.

I’m not out of the markets because I believe timing it is a futile exercise but I moved more money to cash/bonds as valuations got higher. In fact, I stopped buying anything after Feb last year.

Key point now is: What would you do if the markets really present a buying opportunity?

For me, the plan would be something like this:

  1. Split the money you have to invest** into 10 portions.
  2. When the market goes down 10%, invest 1 portion into whatever’s on your watchlist. To keep things simple, I’ll assume it’s the STI ETF.***
  3. If it goes down another 10% (relative the peak), invest 2 portions.
  4. If it goes down another 10% (relative to the peak), invest 3 portions.
  5. If it goes down another 10% (relative to the peak), invest 4 portions. By this time, that sum of money you had will be fully invested.

You could swap the 10% down criteria for months. i.e. Wait 2-3 months instead of seeing whether it goes down 10%. Either way, I don’t think you’ll do very badly in the long run by following such a plan.

My main point is: You need a plan to get through a fall in the markets. Some people panic or they don’t have deep pockets and are forced to sell. This is the kind of opportunity for long-term investors to get in and have their money compound at 10% per year. If you get in when markets are expensive, it’s pretty likely you’ll end up compounding at a rate lower than the average rates.****

Plus, most bear markets don’t go down more than 50%. The times that it did, the run-up in valuations were much more extreme. Even the S&P 500’s CAPE ratio is half that of the dot-com bubble. This time, you don’t hear stories of the financial system being over-leveraged or major players being over-extended. For Singapore, you could even argue that markets were not richly valued by a long shot before Monday. Personally, my money is on a correction or a bear that is extremely short-lived.


*My joke is that cryptos fell because some colleagues and I had to give a presentation to other colleagues. When you have civil servants interested in something, you know it’s time is up.

**This sum should be something you don’t have any urgent need for. You shouldn’t be using money that you need to use to pay the bills or something that you’ll need in the foreseeable future. If you struggle to pay the bills, you shouldn’t even be investing. Get your spending in order first.

***For most people, stock picking isn’t something they should be doing anyway.

****If average rates of return for the STI are 8% a year (which they have been), then buying at low valuations should help you compound above that rate (e.g. 10-12% p.a.) while buying at high valuations will cause you to compound at a rate much lower (e.g. 4-6% p.a.).