View From The Top Of The Market

Mountain peaks challenge the endurance, courage and skill of climbers. A celebration at reaching the top of a mountain – or perhaps more appropriately when you get safely back down – is both understandable and well-earned. But the sense of anticipation and celebration when a sharemarket index is within sight of or hits a new peak is a little harder to fathom.

The Australian market as measured by the S&P/ASX 200 index has been flirting with the 6000 barrier in recent weeks prompting considerable media speculation about when it might crack through this numerical tollgate.

The attention on the 6000 mark is understandable on one level – when the market does finally push above it that will mean it has gone above the high water mark set in January 2008 just before the storms of the global financial crisis hit.

New sharemarket highs are curious beasts. They seem to stir the animal spirits and bring out the cheer squads in a similar vein to the way a rising Australian dollar becomes a source of national pride.

Yet a record high on the sharemarket index is unambiguous in the sense it means prices have risen. So investors looking to invest more into the market are paying a higher price today. When was the last time you went shopping and felt good about paying more for something that you knew was cheaper a week ago?

So does it not seem curious that rising prices can actually make us feel positive about investing more into the sharemarket?

This should not be misconstrued as suggesting another GFC is imminent or prices are forecast to drop any time soon. Prices may well continue to rise for a considerable period of time although we know that the sharemarket is volatile and moves in cycles and we should expect negative years 1 in every 5.

Rather what it points to is the need for a disciplined, well-diversified approach to your entire portfolio – not just to your share portfolio.

Where record highs for market indexes may have a useful purpose is prompting a portfolio review and considering rebalancing the asset allocation to get back in step with your risk profile.

Rebalancing is a rational approach that is confronted by a significant emotional challenge. After a strongly rising sharemarket, rebalancing may mean selling down a portion of the well-performing share portfolio and buying into whatever the underperforming asset class is at the time.

Selling winners and (seemingly) buying losers can be a climb too far for many investors.

Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia.

As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing our website content so it may not be applicable to the particular situation you are considering. You should consider yours and your clients’ circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This website was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.