It is notoriously difficult to identify a stock market bubble until it has already burst. There may be a bull market — where share prices keep rising over an extended period — stretched valuations or fevered demand for the initial public offerings (IPOs) of new companies. There may also be a disconnect between the soaring stock market and economic growth.
It is difficult to predict when or if prices are going to fall. Only time can reveal whether market optimism over share prices was ill-placed.
Whatever leads to them, investors need to recognise that speculative bubbles can be a significant portfolio risk. They can protect themselves by understanding tail risk — the extreme negative outcome of a market crash — and using hedging strategies such as put options, where investors can sell assets at a set price.
Investors could also use contrarian investment strategies, in which they refuse to follow the herd, sell when others buy, and try to achieve better-than-average returns.