The best time to prepare for an event is before it happens. This may sound obvious or even redundant, but all too often I see people who are too busy reacting to things that have already happened to prepare for what may be coming next. And according to prominent experts, the next big event headed toward our portfolios could be the popping of a market bubble.
Experts and market indicators point to a market bubble forming—or say we’re already in one.
Warren Buffett has long relied on a straightforward yet powerful metric to gauge market health: the market cap-to-GDP ratio, often referred to as the “Buffett Indicator.” This tool compares the total value of all publicly traded companies to the country’s gross domestic product (GDP), providing a snapshot of how markets are valued relative to the economy. When the ratio exceeds 100%, stocks may be overvalued. Today the Buffett Indicator stands at a staggering 170%—a level well above historical averages and higher than it was prior to the Dot-Com Bubble burst.
Meanwhile, UBS Global Equity Strategist Andrew Garthwaite says the stock market has met six out of seven conditions that typically signal the formation of a bubble, including pressure on profits, excessive participation by retail traders, and a prevailing sense of overconfidence marked by a “this time, it’s different” sentiment. The only condition that has not yet been met is loose monetary policy, but as the pressure to lower interest rates increases—including pressure directly from the White House—this final criterion is getting closer to being met.
When a bubble bursts, the fallout can be severe, wiping out years of gains in a matter of months.
Market bubbles often build slowly, masked by rising prices and excitement. History has shown us that when they finally pop, it is often too late to seek shelter, and those “holding the bag” are left paying the final cost.
Let’s look at the Dot-Com Bubble as an example. According to the Corporate Finance Institute, this bubble built up between January 1995 and March 2000. When it burst, the Nasdaq Composite index fell by 75%, and by the time the fallout ended in 2002, most of the gains made since the bubble had started building were lost—an estimated $5 trillion.
Is that the sort of hit your savings or retirement portfolio could take right now?
Gold may help you prepare before the bubble bursts.
If analysts and indicators are correct and a bubble is forming (or we’ve already entered a market bubble), then a smart move may be to hedge against any future market corrections rather than helping the bubble get bigger.
One key strategy for this may be to diversify your portfolio with physical gold. Gold has long been seen as a reliable store of wealth in times of uncertainty, offering a powerful sense of security when other assets may be at risk. And it’s not just a “bad news” asset—gold has also experienced significant growth in good economic times.
No one can tell what the future may hold. But if we are headed for another market crash, would you rather wait and hope you can react quickly enough, or would you rather ensure that when the dust settles, you remain on stable ground?
