You will be able to turn a percentage fall into dollars for your own balance and plan your response.
Most people learn about market falls as percentages. The market fell 34%. The index dropped 20% in a month. Those numbers are easy to nod along to in a lesson. They feel very different when they show up as a smaller number in your own account, in your own currency, with the news telling you it could get worse.
Nadia's goal page from lesson 2.4 already has a dollar figure on it: the largest fall she could watch without selling, S$10,000. This lesson puts that figure next to what falls have actually looked like, so the first one doesn't catch her by surprise.
Broad share markets have fallen by a third or more several times in recent decades. The early 2000s, after the dot-com bubble burst, brought a long decline. The global financial crisis of 2008 and 2009 brought a deeper one. In early 2020, as the pandemic spread, markets fell by about a third within weeks.
Each time, broad markets later recovered and went on to new highs. But the recovery times varied a lot. After 2020 it took months. After the falls of the 2000s it took years. Nobody could tell at the bottom which kind of recovery was coming.
So a long-term investor should expect a big fall at some point, and the useful question is how you'll behave when it comes. Over twenty years, Nadia should expect at least one.
A percentage fall means little until you apply it to a balance. A 30% fall on S$20,000 is S$6,000 gone on paper. On S$200,000 it's S$60,000. The percentage is the same. The feeling is not.
Nadia works this out for the balance she expects in five years. From lesson 2.4, she'll have put in about S$35,000 by then, before any growth or loss.
A 20% fall would take S$7,000, leaving S$28,000. A 30% fall would take S$10,500, leaving S$24,500. A 40% fall would take S$14,000, leaving S$21,000.
She looks at those numbers against the S$10,000 she wrote down. A 20% fall is inside her limit. A 30% fall is just past it. A 40% fall is well past it. That's useful to know now, while markets are calm. It tells her that her rules for a fall, which she'll write in lesson 7.5, need to be firm, because a fall of the size history has delivered would go past what she thinks she can stand.
While you hold, a fall is a paper loss. The units are still yours, and if prices recover, so does your balance. When you sell, the loss becomes permanent. You hold cash instead of units, and any recovery happens without you.
The arithmetic of recovery is harsh. After a 30% fall, prices need to rise about 43% just to get back to where they started. After a 40% fall, they need to rise about 67%. Those recoveries have happened before, but they often begin when the news still looks bad, which is exactly when people who sold are waiting for things to feel safer. By the time they buy back in, a large part of the recovery has already passed.
The people who come out of a fall in the worst shape are rarely the ones who held a broad fund through it. They're the ones who sold near the bottom and stayed out.
If you keep investing your regular amount through a fall, each purchase buys more units, because prices are lower. That's the dollar-cost averaging effect from lesson 7.1, Dollar-cost averaging: what it does and does not do, working in your favour at the moment it matters most.
Here's a made-up example using Nadia's plan. When Fund X is at S$3.50, her quarterly S$1,500 buys four board lots of 100 units, 400 units in all. If the price falls 30% to S$2.45, the same S$1,500 buys six lots, 600 units, for S$1,470. Every one of those extra units benefits fully if prices recover.
That doesn't make a fall pleasant. Her balance would still be down, and it could fall further before it turns. But it gives her a reason to keep going that doesn't depend on predicting the bottom.
You can't know in advance exactly how you'll feel watching S$10,000 disappear. What you can do is imagine it honestly now, in specific numbers, and decide what you'll do before it happens. A decision made in a calm month is far more likely to be a good one than a decision made in a frightening one.
Nadia wrote a sentence next to each of her three numbers. Next to S$7,000: "Annoying, but I'd carry on." Next to S$10,500: "I'd want to stop investing. I shouldn't." Next to S$14,000: "I'd want to sell everything. Reread the goal page first."
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.
Work out in dollars what a 20%, 30% and 40% fall would do to the balance you expect in five years, and write how you would feel at each.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).