Summary

• The global markets have seen several bubbles when stock prices jumped out of proportion to their companies’ fundamental values.
• The bubble eventually bursts, resulting in many investors losing their hard-earned money.
• However, there are specific indications about the stock market losing its track and entering into a correction mode.

A stock market bubble generally refers to a situation when the price of an individual stock exceeds its fundamental value. The global markets have seen several bubbles when stock prices jumped out of proportion to their companies’ fundamental values. The bubble eventually bursts, resulting in many investors losing their hard-earned money. Among the famous examples are the internet-based businesses, which triggered the dotcom bubble of the late 1990s.

However, there are specific indications about the stock market losing its track and entering into a correction mode. The wise investors generally track these signs and remain on their toes before anything bad happens.

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Here are three strategies for investors to sail through a bubble-like scenario in stock markets:

Buy an equal-weight fund

Generally, stock markets across the globe are market-cap weighted. The bigger companies have more impact on the benchmark indices than the ones with lower-market capitalisation. During a stock market bubble kind of scenario, investors should eye a fund where each constituent has nearly equal weighting, irrespective of size.

There are exchange-traded funds in the market that measure the performance of the companies listed on a particular index in equal weights. The strategy may not completely save the equal-weight investors, the loss would be significantly lower than a market-cap weighted investor.

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Pick up winners and losers from last year

Even as the strategy may sound a bit weird, it makes sense during a stock market bubble. The technique would serve its purpose the best way when used at the start of a year. The winners would add more value to your portfolio; owing losers is akin to buy low to sell high hopefully.

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Dividend stocks can help

It would help if you look for the companies with a track record of issuing regular dividends. You can identify whether a firm is paying dividends regularly or not by studying the company’s balance sheet and other financial statements. The idea is to purchase a handful of dividend stocks and forget it. The investors can hope these companies to continue to pay or increase their dividends in the future the same way as in the last many years.

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