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Stock market crash: are there warning signs of a stock market bubble set to burst?

Peter Stephens
·3-min read
A stock price graph showing declines, possibly in FTSE 100
A stock price graph showing declines, possibly in FTSE 100

The current stock market bubble is very likely to one day become a stock market crash. After all, indexes such as the FTSE 100 and FTSE 250 have not risen in perpetuity. Their histories are full of bear markets, downturns and corrections.

Despite this, a number of UK shares continue to trade at low prices. This could mean that they offer long-term growth potential as the economic outlook improves. As such, there could be buying opportunities available even after the recent stock market rally.

The bursting of a stock market bubble

While the prospect of a market crash after a stock market bubble may worry some investors, it is unlikely to be a major concern for those individuals with a long-term outlook. After all, the FTSE 100 has experienced numerous declines, including the 1987 crash, plus the dotcom bubble and the global financial crisis.

Despite all of them, it has risen from 1,000 points in 1984 to its current price of around 6,500 points. Therefore, investors who are able to look beyond short-term market declines are likely to profit handsomely from the stock market’s growth.

Trying to dodge the bursting of a stock market bubble can be problematic. If an investor sells stocks too soon, they risk missing out on further gains. However, selling too late means they fail to avoid a stock market crash. As such, a strategy of buying and holding high-quality companies for the long term seems to be more logical than seeking to time the market.

An uncertain outlook creates buying opportunities

Of course, there are signs that the current stock market bubble could burst. A market crash may be caused by risks such as Brexit, an uncertain economic outlook or a number of other factors that cannot be reasonably forecast.

While the presence of such threats may naturally persuade some investors to sell shares, in reality it can create attractive buying opportunities. Risks can mean that stock valuations are lower than they otherwise would be. This can allow an investor to buy high-quality companies for less than they are worth. Over time, their valuations could rise significantly owing to a likely economic recovery that prompts stronger operating conditions for many businesses.

Therefore, rather than worrying about the bursting of a stock market bubble, now may be the right time to buy UK shares. Through building a diverse portfolio of companies in the FTSE 350, it is possible to limit overall risk through reducing company-specific risks. This can allow an investor to benefit from the long-term growth prospects of the stock market. They may even be able to outperform the wider index through purchasing stocks at a discount to what they are worth. This may create scope for additional capital gains in the long run.

The post Stock market crash: are there warning signs of a stock market bubble set to burst? appeared first on The Motley Fool UK.

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Motley Fool UK 2020