The Australian share market is hitting new heights, and of course the question now is whether it is overvalued, or whether it is still a good place to invest. Let’s start with a fundamental truth – nobody in the world can consistently accurately predict the movement of markets. Remember all the doomsayers who sold out of their portfolios when Donald Trump was elected President.
But what we can say with a fairly high degree of certainty is that interest rates throughout the world, and especially Australia, are on the way down. In fact, most economists are predicting that the Reserve Bank will cut the cash rate to 1% on Tuesday next week.
That is certainly good news for homebuyers, and I certainly wouldn’t be rushing to fix my interest rate, if I did have a home loan. Just this week two of the major banks slashed their fixed home loan rates – expect more to follow.
If you are an investor, you need to consider what is called “the doctrine of relative attractiveness” which simply refers to how attractive is one investment when compared to another. It’s easy to prefer cash when rates are very high, but as interest rates fall, income producing assets such as shares and property get relatively more attractive as the gap between interest rates and dividends yields narrows. Let’s face it, the more interest rates fall, the better a franked dividend of 4% per annum looks. Right now, even the index is returning 4.2% of which 80% is franked.
When you take all these factors into account, it’s hard to resist the conclusion that now is a good time to be moving at least part of your portfolio from interest bearing accounts to shares. This assumes of course that you are prepared to take a long-term view, at least five to seven years, to give yourself time to ride out the inevitable market falls which will occur in that time.