So what is happening in the share market? If you listen to the media there are concerns from rising interest rates to China’s economy. The market drops when there are more sellers than buyers. This is true for everything from Bitcoins and houses to shares. The falls we have seen are largely due to no buyers, as opposed to increased sellers. The US share market has grown significantly since November 2016, pricing in all of Trump’s tax policies. This is because it is a leading indicator. It has got ahead of it-self, and is going through a reality check.
Closer to home we have had the Sydney housing market stall and some dips since September last year, in a similar manner, it got too expensive.
So let’s look at the Australian share market. The chart below shows the valuation in the Australian share market being on the cheap side, but that doesn’t mean is isn’t going to drop before any bounce back. Eyeing the rolling 10 year outlook and with the recent drop, the Australian share market remains to be good value. This is priced against cash and bond rates.
Graph 1. ASX 200 Share Price Valuation, Dec 2007 – Feb 2018
Source: Robert MacLean, Equitas Wealth, 2018, Farrelleys Research and Management
Our mantra is essentially as follows:
- Overpriced assets fall most in a crisis, whether bonds, shares, property or Bitcoins.
- If you can’t ride through investment volatility then you need to invest in cash and be prepared to accept a very low rate of return. Moreover, if you are living off your portfolio, then you will most likely be spending capital to fund your living expenses.
- Have sufficient liquidity and cash for emergencies and day to day expenses. One does not want to be selling shares or investments the day they fall, so we need to have some cash at hand for this purpose.
- Excessive debt or the inability to pay the interest costs plus pay off the loan, will increase problems in the event of a crisis. It is imperative that one has a plan in place to pay off debt.
The “old fashioned” way of making money works well. That is: First saving money, then investing it. This tried and true approach works well in all economic environments.
A correction is a normal part of markets. Again we have seen significant volatility and falls in the stock market over the last few weeks. What happens in these moments is that everyone starts to get really anxious (from the media to analysts to investors). Just look at the last few years and the events that have caused short term falls, Grexit (several times), Brexit (didn’t see that one coming), the US fiscal cliff (yes remember that one), the lead up to the US election in 2016.
Try and put the devil (and these anxieties) in perspective.