Turn a percentage fall into dollars for your own balance and plan what you will do.
Nadia (an invented example, carried over from lesson 2.4) says on her goal page that she could watch her investments drop by S$10,000 without selling. Her horizon is twenty years, which makes at least one big fall likely, so she needs to turn that fall into dollars on her own balance and settle now on what she will do about it.
Most people first meet market falls as percentages in the news: a market down 34%, an index that dropped 20% in a month (illustrative headlines). A percentage like that is easy to shrug at in the abstract. Seeing a smaller number in your own account, in your own currency, while the news warns that worse may follow, is a different experience.
The size of your balance changes it as well. On S$20,000, a 30% fall takes S$6,000 off on paper. On S$200,000, the same 30% takes off S$60,000 (both invented figures). The percentage has not changed, yet most people would react quite differently to each of those sums.
If you are investing for something like twenty years, plan on living through at least one big fall. Several times in recent decades, broad share markets have dropped by a third or more. The dot-com bubble burst at the start of the 2000s and was followed by a long decline. The global financial crisis of 2008 and 2009 took markets lower than that. Early in 2020, while the pandemic spread, markets lost about a third of their value within weeks.
Broad markets came back from every one of these falls and later reached new highs. How long that took ranged widely: a matter of months after 2020, several years after the falls of the 2000s. Nobody at the bottom of any of them knew whether a quick or a slow recovery lay ahead. For a long-term investor, a fall coming at some point can be taken as given, and the question worth working on is how you will behave when it arrives.
A drop in value while you still hold your units is a paper loss. You own the same units as before, and your balance climbs back if prices do. Once you sell, the loss becomes real and permanent: you now hold cash, and any recovery that follows happens without you.
Getting back to where you started takes a bigger percentage rise than the fall itself. Prices that drop 30% need to rise about 43% to recover, and a 40% drop needs a rise of about 67%. Recoveries also tend to start while the news is still grim. Someone who sold usually waits until things feel safer before buying back in, and by then much of the recovery has already taken place. After a fall, the people in the worst position are seldom the ones who stayed in a broad fund. More often they sold close to the bottom and stayed out.
If you keep putting in a regular amount while prices are down, each purchase buys more units. Nadia puts S$1,500 a quarter into Fund X, which is sold in board lots, fixed blocks of 100 units. At S$3.50 a unit she gets four lots, 400 units in total. Suppose Fund X drops 30% to S$2.45. The same S$1,500 now gets six lots, 600 units, costing S$1,470. This is the dollar-cost averaging effect from lesson 7.1, "Dollar-cost averaging: what it does and does not do", and during a fall it works for you at the point where it counts most. Each extra unit picked up at the lower price gains in full if prices recover.
Carrying on buying does not make a fall pleasant to live through. Your balance is still lower, and it may drop further before it turns around. It does give you a reason to stay the course that does not rely on guessing where the bottom is.
Nobody can predict exactly how it will feel to watch a large sum vanish from their account. You can, though, picture it honestly today in specific numbers and make your decisions ahead of time. Choices made during a calm month are far more likely to be good than choices made during a frightening one.
Nadia does her sums while markets are calm. Her lesson 2.4 goal page shows she expects to have contributed about S$35,000 after five years, before any growth or loss, so she uses that as her balance. She then checks three falls against her S$10,000 limit:
20%: S$7,000 lost and S$28,000 left, which is inside her limit 30%: S$10,500 lost and S$24,500 left, which is just past her limit 40%: S$14,000 lost and S$21,000 left, which is well past her limit
A fall as large as those history has already produced would take her beyond what she believes she can stand. The rules for a fall she writes in lesson 7.5 therefore need to be firm.
Next to each loss she adds a note about how she expects to react. For S$7,000: annoying, but she would carry on investing. For S$10,500: she would feel like stopping her investments, though she knows she should not. For S$14,000: she would feel like selling everything, so before acting she should reread her goal page.
Take the balance you expect to have five years from now. You can use your expected contributions before growth or loss from your lesson 2.4 goal page, the way Nadia did. For falls of 20%, 30% and 40%, work out how many dollars you would lose and what would be left. Put each loss beside the largest fall your goal page says you could watch without selling, and mark each one as inside your limit, just past it or well past it. Where falls of a size history has delivered take you past that limit, the rules for a fall you write in lesson 7.5 need to be firm.
Do this now, while markets are calm. Use the balance you expect in five years and work out what a 20%, 30% and 40% fall would do to it in dollars. Then write, for each one, how you think you would feel and what you would or should do.
Take the balance you expect in five years and work out in dollars what a 20%, 30% and 40% fall would do to it. Write down how you would feel at each.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).