Take deep breath before plunge: Where to now for Aussie shares?

A strong performance by Australian shares has increased concerns that a fall is coming. Here’s what investors can do to avoid losing out.

Investors thinking about diving headfirst into the rising Australian sharemarket would be wise to take a step back.

Since the election our shares have climbed to 11-year highs and we are among the best-performing stockmarkets on the planet. Since the start of the year they’re up 16 per cent.

And with interest rate cuts and income tax cuts to start flowing through households soon, it’s probably fair to think that good times lay ahead.

However, analysts and experienced investors are not so sure, for a number of reasons including:

• MANY Australian stocks have had a good rally and now appear overvalued.

• WHILE the Reserve Bank’s interest cut has helped share prices, it masks the deeper problem of a weak national economy.

• THE global economy’s outlook is uncertain, with big questions about the US-China trade battle and Brexit.

• THE US sharemarket is near record highs, having trebled in value in the past decade thanks to huge gains by tech giants such as Netflix, Apple and Google’s owner, Alphabet.

The worst time to buy into shares when everybody else is buying, and that’s what’s happening right now.

The sharemarket is always volatile, so it’s a good idea to invest in stocks gradually.

The best time to buy is when everyone’s selling, but you’ve got to be brave. It’s much easier to follow the herd, but herds have a nasty habit of crushing peoples’ dreams of wealth.

Despite our market’s strong recent run, it hasn’t yet returned to its 2007 record high. It’s up almost 70 per cent on its levels of a decade ago — not including dividends — but well below the 200 per cent-plus US performance.

But you can bet that when US stocks eventually fall, we will follow them down.

During the global financial crisis in 2008 and 2009 the US went into recession, Australia didn’t, but our sharemarket still did worse than theirs.

The one certainty about sharemarkets is that they’re going to be unpredictable. The current rally might extend way beyond where commonsense says it should.

Or it may fall. Hard.

A good way to manage investment exposure is to avoid going all-in or selling out based on your feelings or what so-called experts say.

And remember that even if you’ve missed out on the recent sharemarket rally, there’s a good chance you’re still benefiting from it through your superannuation.

Most of us have some exposure to Aussie shares through our super, and the regular 9.5 per cent superannuation guarantee deposits from employers are buying new shares all the time — at different stages of the market cycle.

Super funds demonstrate another valuable lesson for investors: diversify your assets.

Rather than just sticking with one class of asset such as local shares, the funds also spread members’ money across international shares, government bonds and corporate bonds, local and overseas real estate, infrastructure, cash and alternative assets.

That’s much safer than the traditional Aussie investor portfolio of a rental property and a few bank shares.

An investor who’s diversified has a much better chance of handling the next sharemarket downturn, whether that happens in three weeks, three months or three years.

@keanemoney

Originally published as Take deep breath before plunge: Where to now for Aussie shares?