Singapore’s Straits Times Index (SGX: ^STI) had its ups and downs this year.
After surpassing 3,466 in mid-February this year, the index closed almost 10% down from the year’s high last Friday.
Compared to other indexes, the STI is holding up better.
For instance, the US-based NASDAQ has fallen almost 34% from its peak while the S&P 500 is hovering at 25% below its all-time high.
Yet, despite the STI falling by a smaller amount, there are concerns that the economic problems overseas will soon find their way into Singapore.
The World Bank has warned about the possibility of a European Recession.
Meanwhile, the US has already entered into a technical recession after posting two consecutive quarters of gross domestic product (GDP) declines.
As an open economy, our nation may not be spared.
Hunkering down for the storm
Some may think that investing during a recession is reckless.
But investing is only rash when you do not take the right precautions.
At The Smart Dividend Portfolio, we are advocates of getting your basics right before you invst and keeping guidelines simple:
- Create an emergency fund before you invest: An emergency fund is a sum of money that you set aside for rainy days. The key here is to park these funds in a place you can access when you need it most.
- Cash you can use to invest: Any cash that you need to use in the next five years should NOT be in stocks. Period. When investing, we shouldn’t put any near-term cash needs at risk.
- Take your time: No one said that you have to dump all your money in at once. Don’t get caught up with FOMO (fear of missing out). Time is on your side.
The rules above are simple and doable.
More importantly, our experience from decades of investing informs us that simple rules are the most effective.
Doing all the above will help limit the amount of heart burn down the road.
The sky is falling
Many investors see falling share prices as a risk.
Strangely, these same investors will likely behave differently when the price of their favourite wine goes on sale.
The difference is in recognising the value you are getting for the price you pay.
Share prices may fall in the future — but if you have done your homework ahead of time, then you will be better positioned to know which shares to buy.
For instance, if shares of Singapore Exchange (SGX: S68) fell, it would not change the fact that the bourse operator had S$262 million in net cash on its balance sheet at the end of June or that it had generated almost S$540 million in free cash flow for its fiscal 2022.
If anything, a lower share price should be welcomed as you would be able to obtain a higher dividend yield compared to today’s 3.4%.
Likewise, if Sheng Siong’s (SGX: OV8) share price were to fall by 10%, it does not mean that business at its 66 outlets around the island has dropped by a similar amount.
Instead, you are getting a balance sheet loaded with S$235 million in cash and a well-oiled supermarket business that has just generated almost S$131 million of free cash flow in the 12 months before the end of June.
To top it off, Sheng Siong also pays a trailing dividend of 4%.
As you can see, instead of fearing falling share prices, you should be cheering for them as it allows you to pick up shares at lower prices.
Get Smart: Choose optimism
“A ship in the harbour is safe, but that is not what ships are for”
— the late author John A. Shedd
A pessimist cannot see beyond the dark clouds gathering.
The optimist sees through the dark clouds and thinks of what is possible in the future.
Who would you rather be?
It’s not to say that you have to be blind to rising inflation, higher interest rates, and recessions in the near future.
Yet, we should recognise that these are factors outside our control.
How we, as investors, react is the key.
At The Smart Dividend Portfolio, we are continuing to invest, come rain or shine.
In fact, the amount of dividends we collected in the first nine months of 2022 has exceeded the total amount of dividends we collected in 2021.
These results are the fruits of our labour that we planted more two years ago.
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Disclosure: Chin Hui Leong owns shares of SGX and Sheng Siong.