The Best Investing Move To Make Now After a Down Year In 2015

The Best Investing Move To Make Now After a Down Year In 2015

(Source: https://www.fool.sg/2016/01/07/the-best-investing-move-to-make-now-after-a-down-year-in-2015/)

The Straits Times Index (SGX: ^STI) has had a sputtering start to 2016.

After reaching a multi-year high in April 2015, the index has steadily retreated, falling by more than 20% as of yesterday and thus entering bear market territory. (A bear market is defined as one in which stocks fall by 20% or more from a recent high.)

There may be investors looking to make a big move now in search of instant wealth, seeing that stocks have fallen by quite a bunch. But, the best move that we investors can make now, in my opinion, is something much simpler.

Keep calm and carry on

The idea of gaining instant wealth sounds appealing, but may leave a bad taste if things do not work out.

As my colleague Chong Ser Jing has noted previously, the STI’s price-to-earnings (PE) ratio has dwindled to as low as six in the past. If we use the SPDR STI ETF (SGX: ES3) as a proxy for the STI, the exchange traded fund’s (ETF) PE ratio was sitting at 11.6 at the close yesterday. What this means is, if history were to repeat itself, the STI could fall to price levels which are 50% lower than where it is now if we keep earnings constant.

So where does this leave us, Foolish investors?

The first thing to do may be to accept that we have no clue where the market will be at the end of this year or the next. With that setting, we can move on to the next steps.

This is what I’m doing. My approach is to invest on a monthly basis and to keep a cash cushion. My cash cushion will be deployed in stages, in a similar manner to what my colleague Morgan Housel has suggested before. In his table below, Morgan assumes a cash cushion of $1,000 and tries to match the amount to invest with the historical frequency of stocks falling by a certain level.

The underlying assumption behind the deployment of my cash cushion in market declines is that I am able to find good companies at fair prices to invest in. If not, I am happy to sit on cash and patiently wait for the next opportunity. I have used this approach with success.

Admittedly, my approach may not be for everyone. And that’s okay.

The most important thing in investing may be to find the investing approach that keeps you calm in all seasons in the stock market. When you find that approach, it may be the best investing move you can make today and in the decades ahead.