Two weeks ago, as the Singapore stock market fell for seven days in a row, I got increasingly excited.
Over in Hong Kong, the Hang Seng Index (INDEXHANGSENG: ^HSI) had also declined for seven days in a row, its longest losing streak since November 2021.
The fall was good news to me as I was looking to increase my stake in some of the stocks within my personal portfolio.
When I told my friend that I was wishing for the market to fall further, she looked at me as if I had grown a second head.
My friend was anything but pleased to hear that the market had consistently fallen for seven straight sessions.
I instantly felt bad that I was feeling gleeful while she was feeling hurt over her shrinking portfolio size.
To be a contrarian
But truth be told, being contrarian in this respect should not make me embarrassed. (Instead, I should have been more mindful to her circumstances)
Just ask one of the best investors in the world – Warren Buffett.
He poses a very interesting question for investors – if you plan to be a net saver during the next five years, should you hope for higher or lower stock prices during this period?
According to the Oracle of Omaha, many investors get this wrong.
They end up feeling elated when prices rise and depressed when they fall even though they have cash to deploy in the market.
His logic is simple – if you intend to continue investing money in solid, well-managed stocks, then you should wish for lower prices.
Two good examples of such stocks here in the Singapore stock market are DBS Group (SGX: D05) and Singapore Exchange Limited (SGX: S68).
Only then can you enjoy a better long-term return and a dividend yield that can beat inflation.
Different strokes for different folks
After my friend’s revelation, it dawned on me that different people have different methods of managing their investment portfolios.
The way we manage our portfolios at The Smart Investor is similar to the way I manage my personal investment portfolio – to always have some cash handy to take advantage of sharp and unexplained market drawdowns.
When investors are feeling anxious, panic and head for the exits, that is when strong companies get sold down to attractive levels.
Hence, I always feel excited when share prices decline as I am, as Buffett would describe, a “net saver”.
By socking away some money every month, I build up a stash of cash that can be deployed when markets are plunging.
Not everyone manages their portfolio the same way, though.
I have spoken to friends who let a big part of their portfolio sit in cash because they are always hunting for opportunities in the stock market.
The downside is that by doing so, you miss out on a chunk of compounding when share prices head higher.
On the flip side, there are also people who are fully invested and do not keep much cash in their opportunity fund.
The problem with not having any cash is that they will not have any money to deploy into great stocks when a crash inevitably arrives.
I believe there should be a middle ground.
You should keep sufficient cash to scoop up bargains when they pop up while keeping a large proportion of your money invested in the market to enjoy the dividends and capital gains when these businesses do well.
In short, it is all about balance.
Get Smart: Opportunities
Of course, it can still be an uncomfortable feeling when you watch the shares you bought at a particular price nosedive.
But let us sit down and think about this for a moment.
Is it a good thing if share prices keep rising and never fall?
On one hand, you may rejoice as you feel a lot richer.
But it also means you will not have the chance to buy any stocks cheaply if prices constantly rise.
In reality, stock prices never go up in a straight line.
Even the best companies face stomach-churning volatility as they encounter a plethora of macroeconomic concerns and face slowdowns in demand from time to time.
Therefore, waiting for market declines can be one way to scoop up great bargains.
And if you continue to buy consistently and reinvest your dividends into these same stocks, compounding will ensure your wealth can grow to a sizable sum by the time you hang up the towel.
Falling share prices may be uncomfortable to watch, but they are an effective way for you to build long-term, enduring wealth.
The best gift a responsible parent can give their child is a secure, comfortable financial future. And we found that dividend investing is one of the easiest and effortless methods to do it. Our latest FREE report reveals how you can do it, plus the 3 SGX stocks you can buy today to start future-proofing your child’s financial future. Click HERE to grab a copy of the guide.
Disclosure: Royston Yang owns shares of DBS Group and Singapore Exchange Limited.
