Something about the S&P/ASX 200 Index (ASX: XJO) hitting a new record high sparks the question, "Should I be selling shares now?".
We're all susceptible to the scepticism that often accompanies a solid run in the market. You know the feeling, the old 'If it's too good to be true, it probably is' motto.
When the sun has been shining for a while, you start preempting the gloomy weather. And oh boy, has it been a sunny streak for the Australian share market. The benchmark index is up a mighty 12.4% over the past 12 months — 2.4% more than the average return over the last 20 years.
But does it really make sense to sell now?
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Is a record high on the ASX enough reason to sell?
The ASX 200 hit an intraday high of 8,153.50 points yesterday before settling at 8,142.1 to end the session. Australia's top 200 companies have never traded this high ever before, which may have some investors reaching for the sell button to lock in those profits.
But here's a question… what does 8,153.50 points actually mean? It's a fairly arbitrary number by itself when you think about it. The number basically reflects the sum of market capitalisations of all 200 companies within the index before being divided by a base value of 200.
The record-high index level says nothing about whether the ASX 200 (or the companies within it) are overvalued or undervalued. It means the combined value of these companies is higher than ever, but maybe there's a reason.
If the combined earnings of Australia's top 200 companies increased 20%, but the index level gained 10%, is the ASX 200 more or less 'expensive'?
Despite analysts and the media referencing the four-digit number every business day, it's really unhelpful as an instructional tool for investment decision-making. It fails to give any actual insight.
It's like saying a meat tray is $100 today when it was $90 last week, but the amount of meat you get on the tray now might be different. Most people would say, "Well, it's pretty important I know how much I'm paying per kilo of meat".
Precisely. What matters is what you're getting for the price or 'level' being paid.
Here's what I'm doing right now
I firmly believe there is always a pocket of value to be found in all markets. Even if the ASX 200 were 'overvalued' at its record high, there's probably still a good handful of companies being overlooked or underappreciated.
Aside from some money I hold in a mortgage offset account, I'm fully invested. And I've identified at least three ASX shares I'll be buying the minute I have any spare cash, regardless of the ASX hitting record highs… because 'the market' isn't representative of all publicly traded companies.
Do I think the overall market is overvalued? To be honest, I don't know. I've never put in the legwork to come to such a conclusion.
Why? Because I don't need to. Roughly right is sometimes enough, and I roughly think that over my investment horizon, dollar-cost averaging into good companies and exchange-traded funds (ETFs) will make me far wealthier than trying (and likely failing) to sell at the top and buy at the bottom.
