Is the share market over valued?

The Australian share market reached new highs last week, even though projected profits of most companies are subdued. So, is the Australian share market over valued? And, if it is, what can retirees do to guard themselves against investment losses?

Shares are expensive

When you compare current prices of shares with their profits, shares are undoubtedly expensive today. Within the past 12 months the average price to earnings ratio on the Australian share market has increased from 14.4 to 18.3.

But that doesn’t mean that a market crash is imminent.  Positive investor sentiment can cause share market rallies to go on longer than anyone can anticipate.  And without a catalyst like rising unemployment, the bull run may continue for months or even years.

Downside risk

But the fact is, When we are seeing record share prices and historically high price to earnings ratios, investment risk is magnified. Share prices have further to fall in the event of bad news.

So, what should retiree investors be doing now to protect themselves from a market shock?

Market timing is hard (and risky)

In a perfect world, we would sell our shares at the top of the market cycle and buy them at the bottom.   But that’s impossible. Switch to cash too early and you will miss out on any potential market rally.  Not to mention the dilemma of when to re-enter the market.

But there are sensible strategies you can implement to guard yourself against investment losses, while still participating in market growth.

Rebalance your portfolio

Now might be the perfect time to reset your investments. Retirement portfolios tend to get more aggressive over time, as you may be drawing down on cash to fund your living expenses,

By rebalancing, you will be locking in profits from your growth assets, and at the same time de-risking your investments.

Average out of the market

After 30 years of economic growth in Australia, you may be able to invest more conservatively and still achieve your financial goals. 

Rather than switching all at once, you might choose a period of, say, 3 to 12 months over which to proportionally de-risk your investments.  As every month goes by, your investments are getting more conservative, but you are still hedging your bets by retaining exposure to the share market.

At Daniel Crump Financial Planning, we are independent advisers who can help you manage investment risk. If you’d like to know more, give us a call.  We would love to help.

-        Daniel Crump is an independent financial adviser

This article is general and does not consider your personal circumstances so it may not be appropriate to you.  If you would like advice specific to you, please let us know at daniel@danielcrumpfp.com.au