Financial Freedom SG

This is a very common question investors are asking now. It is a billion dollar question that one should always ask before investing. So is the market really high now for you to put money back into your piggy bank?

First, you should look at the prices of the market to see if they are really high historically. Since I was once a history teacher, the history of how the markets trend is interesting to me. The answer to this question really is that the many markets over the world are at a historic high point. So does that mean that you leave the market? The answer is that it depends.

Earnings of companies is the second thing we look at, basically this means that if the earnings of companies in the economies are also high and increasing, then the prices of the markets reflects the fair value and not at a artifically high price. This can be analysed by looking at the countries economies, their gdp figures, unemployment etc. So it is important to look at both the price and the earnings to see if you are likely to get a fair value on your investment.

This brings us to the third thing one should look at when deciding if the market is not worth investing- the P/E ratio of the markets. This is the Price over Earnings ratio that investors commonly use in their decision making on which stock to buy or sell. This ratio can also be used as an indicator for you to estimate the time for you to start buying or selling your investments. As the chart above, from Ticker Sense, indicate, if you had know the P/E ratio at 1999 was above 30, you would be very worried and had trimmed your holdings. If you did so, you would have escaped the biggest meltdown in market history, a combination of tech bubble bursting, the 911, SARS etc. Then when you have seen in 2003 that the P/E ratio had gone to the low 20s and below, you would have started your investments into the equities market again. At this moment, the P/E ratio is around 20. So do you still think that the prices of the markets are too high?

A sad thing that is always seen is when many ordinary investors stay away from the markets because they perceive the market to be at a high price and stay away when other investors stay invested and go on to reap a high return as the markets moves further up. Then the investors who had not invested goes into panic and starts to invest at near the peak and is left holding the can when it drops and savvy investors pull out of the markets.

The only thing that I am worried about is the China market overheating. Various reports from the internet shows that the Chinese equity market is above the 30 P/E ratio. Unlike the US markets which has historic trends from which investors can draw lessons from, there is a lack of longer term data on the Chinese market which has been on the up and up. So I would be wary of investing in China's market as it is looking overbought.

There is a lot of data on the internet about the P/E ratios for various countries, so before you start to invest or pull out your investments, take some time to do your research on these ratios. Then approach your financial advisor or broker to execute your decision.

As the latin saying goes, Caveat Emptor or "Buyers Beware".