We're only five days (and four trading days) into the month of December, and already, the S&P/ASX 200 Index (ASX: XJO) has hit another new record high. Yep, Tuesday's session saw the ASX 200 cross 8,500 points for the first time ever. It was just the latest in a long line of new all-time highs for ASX shares we've seen this year.
Whilst 2024 has been a phenomenal year to own ASX shares, many investors, not to mention prospective investors, might be feeling queasy about buying in right now. Given the above-average gains this year has already brought us, and all.
After all, higher ASX share prices, particularly from expanding price-to-earnings (P/E) ratios, translate into higher risk for new buyers.
But don't take it from me. Take it from legendary investor Warren Buffett, who once said this:
Whether we're talking about stocks or socks, I like buying quality merchandise when it is marked down.
He also once stated:
The three most important words in investing are 'margin of safety.'
The vast majority of quality ASX shares are most certainly not marked down right now. And that means that finding a top-shelf company with a margin of safety is a very difficult task indeed.
But ASX investors shouldn't despair.
Image source: Getty Images
How to invest when ASX shares are at record highs
For one, index investing, particularly through a dollar-cost averaging strategy, has proved to be an effective path to accumulating wealth through all kinds of markets.
If you are a long-term investor, I think you can still feel confident in periodically investing in a cheap, diversified index fund, even at current prices. But make sure you continue to buy with the same gusto next time there is a stock market correction or crash. This strategy doesn't work very well if you only 'buy high'.
But if you can't stomach putting any more capital into the stock market right now, there are still plenty of alternatives.
There's always that great Australian pastime – buying property – to consider. However, I acknowledge that this isn't an easy alternative for most readers.
That's why you might want to take advantage of the current high interest rate environment. Most Australians would be aware that interest rates are currently at decade-highs. While this has caused a lot of economic pain for many Australians, high rates do come with a silver lining.
Cash and offset accounts can balance ASX shares
Interest rates on savings accounts and term deposits haven't been as high as they are today in many years. You can easily put your money in the bank (savings account or term deposit) and secure an interest rate of at least 5% right now.
That's a 5% return with zero risk (up to $250,000 anyway). Most of the popular ASX dividend shares are presently offering much less than 5% in yield today, thanks to rising share prices. To illustrate, Commonwealth Bank of Australia (ASX: CBA) stock will only get you a 2.94% trailing yield right now.
As such, if you value capital preservation, a term deposit might be a good alternative to shares in the current environment. If you don't want to use a term deposit or a savings account, a good ASX alternative is a cash exchange-traded fund (ETF) like the BetaShares Australian High-Interest Cash ETF (ASX: AAA) or the iShares Core Cash ETF (ASX: BILL).
Alternatively, if you already have a mortgage on a property, you might want to take advantage of an offset account. With high interest rates, an offset account can help you benefit from holding cash but without paying those pesky taxes on interest earned at the bank.
Remember, holding a dollar in an offset account attached to a 7% mortgage will net you a real return of 7% on that dollar every year until the mortgage is paid off.
Don't forget about bonds
If you don't have a mortgage, another alternative to the share market that has the potential to deliver some reasonable returns is bonds. It's difficult for most ordinary investors to invest in government or corporate bonds directly. However, once again, ASX ETFs provide an avenue.
For example, the Vanguard Australian Fixed Interest ETF (ASX: VAF) and the iShares Core Composite Bond ETF (ASX: IAF) are two popular options. Both offer yields of between 2-3% right now, and could increase in value if interest rates start falling.
Foolish takeaway
The recent record highs of the share market are certainly something to take into account if you have money to invest right now.
But don't despair. This is not 2021, and there are many alternatives to the share market if you're looking for real yield but are not comfortable with the recent highs.
