Share Market Expected to Rise to 7,600 Points

As an increasing number of first-time investors enter the stock market, we are finding that they are investing in areas that are not only unsuitable for them but also their portfolio. Investors typically flock to investments that produce the best return from last year, last month and even last week when investing in stocks, cryptocurrencies or the latest IPO.

Why buying yesterday’s returns won’t make you wealthy

When presented with a choice of having a blue-chip portfolio or a growth portfolio, over 90 per cent of investors typically choose growth because they believe they will make more money from this style of portfolio. While it is logical to expect higher growth from this portfolio style, what most don’t consider is the volatility that a growth asset or portfolio is subjected to over time.

Growth investments have much larger swings in price than defensive assets and, as such, investors need to be able to handle this risk. Unfortunately, however, inexperienced investors tend to buy growth assets that have already risen through fear of missing out or they sell out to early for fear of losing.

Based on this behaviour, there are two lessons that can be learnt: the first is that you can’t buy yesterday’s returns because buying into something that has already risen strongly believing you will gain the same return in the future is a flawed strategy, and secondly investors need to invest in assets that are congruent with their risk profile.

Let me say that risk is a far more important consideration than the return you will achieve when assessing an investment, which is why this should be every investor’s number one priority. Right now, there are masses of inexperienced investors attempting to profit from Bitcoin believing it will achieve last year’s return in the next year. Of course, when it is rising, everyone is blissfully unaware of the risks. But once again, this thinking is flawed, as Bitcoin is a very volatile investment and when it does fall, it falls heavily.

Unfortunately, when Bitcoin does start to fall again, many will see how risky this investment really is, particularly the inexperienced. No doubt, those who have put their money in Bitcoin or other cryptocurrencies will come to regret their decision.

What were the best and worst performing sectors last week?

Information Technology was the strong performer up 7.80 per cent followed by Materials and Consumer Discretionary both up over 3 per cent. The worst performing sectors included Utilities, which was up 0.35 per cent followed by Consumer Staples up 0.40 per cent and Healthcare up 0.71 per cent.

The best performers in the ASX/S&P top 100 stocks included Afterpay up 15.12 per cent followed by Cleanaway Waste Management up 12.27 per cent and Northern Start Resources up 11.22 per cent. The worst performing stocks included AMP down 4.91 per cent followed by Incitec Pivot down 3.77 per cent and Ansell down 1.05 per cent.

What's next for the Australian share market?

After a lack lustre week the prior week, the market put on a show last week, as it rose strongly to close higher than it opened on each day. But more importantly, it looks to have finally decided on a direction, which for now is up. In my last report, I mentioned that to change my mind about the market being short term bearish to bullish, it needed to rise above 7,200 points and last week it did just that.

I would have preferred the market to fall away slightly before rising, as this would have made the subsequent rise steadier and more sustainable. Right now, it looks likely that the market will be mostly bullish for the next four weeks and possibly longer, as it rises to around 7,600 points.

That said, I am mindful that we have not had any significant pull back since March 2020 and the longer in time that price moves higher, the higher the probability of a fall. This means we need to be prepared that the market may only rise for a short period before falling away.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.