The NASDAQ Composite Index (INDEX: .IXIC) closed the first half of the year with a near-33% gain, its biggest increase since 1983.
It’s a performance which didn’t look likely at the start of this year.
Similarly, the S&P 500 (INDEX: .INX) ended slightly ahead of the 4,450 level, making a mockery of analyst forecasts at the tail end of last year.
Back in December 2022, prominent analysts had pencilled in an average target of 4,080 for the S&P 500 for 2023.
What have we learnt?
Firstly, this sequence of events demonstrates why it is so difficult to predict where markets are headed next.
Many were too busy trying to figure out where interest rates were headed and what the US Federal Reserve would do next.
Secondly, and more importantly, if you were not invested, you would have missed out on this gain.
When fear overwhelms reason
Holding stocks through a period of decline is easier said than done.
That is especially true in moments where nothing seems to go your way. We experienced this in 2022, where the NASDAQ index plunged 33% year on year.
Source: YCharts
As the market reached its nadir last year (see red circle above), I started to sense a familiar feeling.
It was the same emotion I experienced when the Great Financial Crisis (GFC) swept through US markets in 2008; a feeling of dread had given way to indifference where investors no longer wanted to have anything to do with the stock market.
At this moment, I knew it was time to speak up.
That’s because it was no longer about what stock to buy or what trend to follow. All that didn’t matter because behind the investor’s indifference was FEAR.
In October 2022, I penned my thoughts on the matter (bolded for emphasis) in our weekly Get Smart to all our readers:
“Fear is a strong emotion, especially when it comes to investing.
Fear consumes us.
If left unchecked, it takes over and dictates the way we think.
Today, fear is paralysing, scaring us from buying stocks, even when we know we should.
Yet, to fear is to be human.
It’s the emotion lurking in your heart, uninvited, and must be confronted for you to get past it.
… dark clouds are gathering on the horizon.
Whether it is runaway inflation, higher interest rates, or economic recession, all these troubles point in one direction — UNCERTAINTY.
The thing is, worrying over what may or may not happen will not make you any more intelligent.
Worrying even causes you to miss out on the positive developments at companies.”
In my mind, as long as FEAR existed, it didn’t matter what data, stock or quote I had. We had to confront this paralysing emotion — otherwise, investors will not find it in themselves to act.
That, to me, was the most important thing.
The lingering fear of the unknown
A month later, in November 2022, I shared my thoughts with a wider audience on Singapore’s Business Times HERE (for the non-paywall version, click HERE):
“Peter Lynch once said that you can be the world’s greatest expert in financial statements but without a strong stomach, you will succumb to the negative headlines, and sell in panic when share prices go down.
That is what’s happening today.
With dark clouds gathering around the global economy, stocks are generally cheaper today compared to the past two years.
Yet, many are not won over by the lower valuations.
It’s not for the lack of data or analysis. There is more information readily available today than there has ever been.
Instead, the root of the problem is something simpler — FEAR.”
Within the article, I spoke about the simple steps any investor can take to push back on this inherent emotion:
- Remove the column which shows the daily stock movements in your portfolio.
- Implement simple guide rails to moderate your pace of buying or selling.
- Start writing down the reasons why you bought a stock, its valuation and the risks you see.
These are easy to do steps which are effective.
In fact, across all our portfolio services, The Smart All Stars Portfolio, the Smart Dividend Portfolio, and David Kuo’s Income Portfolio, our foundation lessons suggest four easy to follow steps:
- You can start with the basics: an emergency fund. Simply said, 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.
- Any cash that you need to use in the next five years should NOT be in stocks. Period. Any money you don’t need within the next five years can be considered as a candidate for the stock market.
- Once you have identified the spare cash that you don’t need for the next five years — it is imperative to exercise restraint, and not pour all your cash into the stock market at one go.
Again, the theme here is simplicity. You don’t need complicated steps to follow to be effective.
Get Smart: The Right Mindset
Before I go, I need to make something clear.
When I wrote the articles above, I had no idea what the stock market would do in the first half of 2023. I certainly did not expect the NASDAQ index to produce its best six-month run in 40 years.
All I recognised was that we should remain invested.
To do well, the right mindset was needed, whether the stock market would go up or down.
The calm mindset helps us make better investment decisions, especially when our chips are down.
Above all, as I shared in the January 2023 FSM Event panel discussion HERE, you cannot be indifferent to the stock market because of the potential returns it can offer over the long term.
That’s how great investment returns are achieved.
It’s all within your reach.
If you’re looking to invest in 2023, our latest FREE report can guide you. It shows you how to find dividend stocks in SGX, and a nearly fool-proof way of building your portfolio. Many people love dividend investing, but few truly know how to profit from it consistently. Click the link here to download our new report and discover the secrets!
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Disclosure: Chin Hui Leong does not own any of the companies mentioned.
