Log inAre markets overvalued?
The FTSE100 index is at an all-time high, as is its US equivalent, the Dow Jones index. After seeing gains of 30% in the last 18 months, many investors are wondering if they should take their profits and run, before markets tumble.
Is this the right time to cash in?
Unfortunately, it isn’t an easy question to answer since it all depends upon your circumstances and what you need your money to do for you. If you are about to use your investments for some specific purpose and you require absolute certainty that the funds you have won’t drop in value over the coming months, then the answer is undoubtedly yes, cash in, take your profits and use the money for its planned purpose.
What if you are a medium to long term investor?
If your investment timescales are 3 to 5 years and beyond, then the chances are that you will be better off remaining invested rather than cashing in. This is because although markets are at record highs, it doesn’t necessarily follow that they are about to crash.
It is of crucial importance to consider what alternatives you have, compared to remaining invested. Holding cash in a bank or building society account isn’t going to earn you very much at today’s rates.
This comparison of what you can earn by being invested in a diverse and risk rated portfolio of funds compared to cash in a deposit account gets to the heart of the issue.
Ten years ago, it wasn’t particularly difficult to find accounts paying 5 or 6% per year. The choice for investors back then was to remain invested in the stock market and hope to earn 5 or 6% a year with some risk or cash in and put your money on deposit and earn a similar amount risk free.
However, the equation today is rather different. You can earn 5 to 6% per year by being invested in markets, with some risk, or cash in and earn 0.5% per annum risk free. With inflation at 3%, that means your money is devaluing at 2.5% each year.
Low interest rates provide a safety net for markets
Markets can fluctuate considerably, particularly when investors are worried that they may be overvalued and are about to sell off. A bad news story can send markets into a sell off with a resulting fall in values. However, once the dust settles and those same investors realise there is nowhere else to go, they reinvest back into the same markets.
What does the future hold?
Most likely, more of the same. Economic conditions are not booming but they are benign. Unemployment is very low and companies are making decent profits.
Volatility apart, it’s difficult to see what will cause the next big sell off. Perhaps this most unloved of bull markets has further to run.