Are today’s high asset prices worth the risk?
Central banks have signalled that, if required, they would support their economies by cutting rates even further. This means markets are not likely to crash any time soon. But with most asset prices quite toppy, are investment returns worth the risk of something going wrong?
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Max Zan
:
Hi Roger
I recently did some homework to find out what a realistic return an Investor can expect from the Australian Sharemarket based on an after inflation return and also based on current 10 Year Australian Bond rates.
Over decades the All Ordinaries Accumulation Index – Real (after CPI Inflation) return has averaged approximately 6.4%. The “current” inflation rate is 1.3%, so a nominal return of 7.7% is all that can be expected at this point in time. The RBA has set an inflation target of between 2% to 3% . If over the “long term” inflation averages 2.5%, then a nominal return of 8.9% is what a wise and cautious investor should strive to achieve even though the “current” nominal return of 7.7% is all that can be expected.
What is also interesting to note is that the “current” Australian 10 year Bond yield is about 1.75%. If an Investor currently strives for a nominal return of 7.7%, it then follows that the Equity Risk Premium (ERP) amounts to 5.95% which is still a very acceptable number. The RBA has set a target for a “neutral” 10 year bond rate of 3%. If a “long Term ” Investor strives for a nominal 8.9% Return, then the “long term”ERP becomes 5.9% which is almost identical to the “current” ERP of 5.95%.
My conclusion is that if you are a “short term” Investor a nominal return of 7.7% is OK, but a wise and cautious Investor should strive for a nominal return of no less than 8.9%. Based on that , I tend to agree with you Roger that the current market is a bit on the “toppy” side, but if opportunities arise when markets get the wobbles it can throw up some good opportunities to Invest.