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Investing in shares

Investing in Shares – is now a good time?

Chris Morcom
Partner/Private Client Adviser
4 Aug 2011

When share markets are as volatile as they are now, one question we are often asked is, when is a good time to invest in shares?  

The answer to that question will depend on your circumstances.

If you are investing for the longer term (seven to ten years at a minimum), shares are attractive;  dividends that increase over time and long term growth in share prices make them  a great long term investment.

But share investors need to be able to cope with the short term volatility in their capital.  Shares are priced almost every second of the day.  Traders buy and sell their shares at what they consider to be an appropriate price and the share market is not an efficient market.  Emotion and sentiment play a big part in the actions of market participants, and this inefficiency offers longer term investors the opportunity to build wealth.

Consider the major Australian banks’ share prices.  The table below compares current five year term deposit rates to the expected dividends to be paid by the four major banks over the current financial year.

The table demonstrates that if dividends remain stable for the next five years, then investors are much better off to invest in shares rather than term deposits when considering income in isolation.

Traditionally, Australian banks have traded on a Price to Earnings ratio of around 13 times.  The current Price to Earnings (PE) ratio is much lower. This suggests that either the share prices of the banks need to rise around 40%, or bank earnings are going to fall by around 40%.

If you are thinking about investing in term deposits to keep your money safe, consider this: while your capital remains static, its purchasing power reduces over time due to the impact of inflation.  Even if share prices remain static, the higher income received would offset the impact of inflation on your invested capital.

With dividends remaining stable, an investor in bank shares could sustain a 20% fall in share price, and still be on an even par with the investor in the term deposit.

So is now a good time to invest in shares? 

The fundamentals for share market investment do look compelling, and while we expect the share market to remain volatile – for the long term investor, there is certainly value in investing in quality Australian company shares at the moment.


Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.