BLOG: Bubble or not? It doesn’t matter

Written by:
Why the insistence on trying to second guess whether or not markets are in a bubble? There is certainly an ongoing ‘bubble' of talk about market bubbles...and it's showing no sign of bursting.
BLOG: Bubble or not? It doesn’t matter

It is true that many financial markets have undergone significant growth in recent years, and many are quite richly valued. However, as to whether any of these markets constitute a ‘bubble’ could hardly be less relevant.

Knowing whether a market is in a bubble or not does not give you any extra ability when it comes to market timing. Bear markets are a natural feature of the investment landscape, and the risk of a market going into one is always there, irrespective of whether that market has been deemed a ‘bubble’. Therefore, even if you concluded that the current market conditions are not bubble-like, this does not prevent you from potentially losing a lot of money!

Equally, excessive valuations can persist for far longer than one might imagine. So, even a market in a bubble can move a lot higher, and opportunities still exist to make further returns.

A bull market is more likely to end on deteriorating fundamentals (such as declining return on equity or profit margins) than on high prices (which can always go even higher). The depth of any subsequent market fall can however bear relation to whatever the market was originally valued at, so the scale of potential future gain or loss should be factored into your thinking.

The bottom line is that those seeking to declare a bubble, or otherwise, are simply another species of investors who think they can accurately time the market, and with an equally poor track record. As Howard Marks put it: “There can be more risk in thinking that you know something, than in accepting that you don’t¹.”

Fortunately you don’t need to get involved in this guessing game, as a properly diversified and risk controlled portfolio should be for “all seasons”, and can instead look to take advantage of market turbulence, as and when it arrives.
Who knows if we are in a bubble. That is not the point, it doesn’t matter – investors and media are hyper-ventilating over a measure that has no informational value.

¹ Howard Marks, ‘The Most Important Thing’ (2011)

Andrew Wilson is head of investment at Towry

Tag Box

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

ISAs: your back-to-basics guide for 2018/19

Here’s everything you need to know to make the most of your unused ISA allowance ahead of the 5 April deadli...

A guide to Sharia savings accounts

A number of Sharia savings products have upped their game in recent months, beating more familiar competitors ...

Five ways to get on the property ladder without the Bank of Mum and Dad

A report suggests the Bank of Mum and Dad is running low on funds. Fortunately, there are other options for st...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week

Read previous post:
Fund of the Fortnight: Kames Property Income

Every fortnight our research experts highlight a fund from their top-rated list. The latest: Kames Property Income