Dear Smart Investor,
Singapore’s Straits Times Index (SGX: ^STI) fell 2.1% last week.
Despite this decline, the local index is up 11.3% since the start of the year.
Throughout the year, the STI has gone back and forth, ending with a daily gain in 55% of the trading days and down 45% the rest of the time.
Translation: if you are betting on the daily movements of the stock market, your odds of guessing the direction of the index correctly are not much better than a coin flip.
That’s in the past, of course — so, what about the future?
With a double-digit rise in the STI this year thus far, should you be expecting another bountiful year for 2022?
Or should you adopt a more cautious stance to guard against a decline?
Fear of heights
Guessing the direction of the stock market is a fool’s errand.
Yet, some of us may fear a market decline in 2022.
This worry is not entirely unjustified.
History has shown that stock market crashes can happen from time to time.
Between 1993 and 2021, a period of 29 years, there have been 24 instances where the Straits Times Index has declined by 10% or more from its year’s peak to trough.
In short, such a decline has happened around eight out of every 10 years.
Larger declines of 20% or greater are less common, occurring about four times every decade.
Source: S&P Global Market Intelligence; Wall Street Journal; Yahoo Finance; author’s calculation
The rarest decline is that of when the STI is when the index is cut in half during the year.
Such an event has reared its ugly head in two out of the past 29 years.
Though it may seem that we are overdue for a major decline, more context is needed.
For instance, before the Great Financial Crisis of 2007 and 2008, the Singapore index was sporting a price-to-earnings ratio of 30 times on 1 October 2007.
Today, the STI valuation is closer to 16.6 times.
Certainly, we cannot say that today’s valuations are low.
But we are nowhere near 2007 valuation levels.
Like the proverbial Goldilocks, the stock market porridge is neither too hot nor too cold.
The Smarter Way
At The Smart Investor, we do not try to guess the stock market direction from one year to the next, let alone weekly or monthly movements.
If we did, we would not have started The Smart Dividend Portfolio in January 2020. At the time of the market high.
That’s right, we started investing just before the pandemic swept through the world …
… decimating many businesses around the world.
Yet, despite the turbulence, we leaned on what we knew best.
Buying great businesses that have the audacity to keep paying dividends.
Instead of daily stock movements, we turned our attention to the sustainability of the business behind the stock ticker.
Our reasoning was simple.
We knew that if the businesses could continue to generate cash, the dividends would follow.
Today, nearly 2 years later, the Smart Dividend Portfolio is filled with 23 stocks that do exactly that: pay us dividends for life.
Your 2022 game plan
Instead of worrying over where the stock market is going in 2022, we invite you to flip the script — and think about the businesses you want to own.
Over the past two years, we have demonstrated that investing regularly works.
The idea behind putting your money to work every month is not rocket science.
By buying companies that are consistent dividend payers, you will receive regular income straight to your bank account.
This cash can be put back to work by deploying it into the same dividend payers to generate even more income in the future.
Do that next year, the year after that, year after year …
… and you will start to see the magic of compounding.
Get Smart: Plant your dividend tree today
What starts as a small seedling can eventually grow into a tree that bears bountiful fruits, a reward for our patience as Smart Investors.
Our flagship service, The Smart Dividend Portfolio, is a little under two years old, and we have seen our accumulated dividends triple in 2021 compared to the end of last year.
Not only that, we have also seen the value of the portfolio increase by almost 31%. In fact, if we measure based on net asset value, the portfolio is up even more at 43%.
At David Kuo’s Income Portfolios, our property-focused portfolio, Kuo’s Income Portfolio is now worth S$278,894, against our original invested amount of $200,000.
The Straits Times Index, on the other hand, has only gained 1.6% over the same period when we started putting our money to work.
Our results didn’t come by chance. They have been achieved by judiciously ploughing back any dividends generated by the portfolio into more of those reliable income-generating shares. It is a testament to the power of compounding.
Our beginner’s guide to investing is finally here! Many investors took years to understand the principles inside, but you can have it all in one afternoon. If you have just started investing, download our free guide today so you can catch up quickly. Click here to download now.
Disclaimer: Chin Hui Leong does not own any of the companies mentioned.