Stocktake: Losing the fear of selling out of a bubble too early

Stock market valuations may be soaring, but talk of bubbles invariably raises the question: what if you sell too early?

Don't worry, says Richard Bernstein Advisors, it's "never too early to sell a bubble".

After being bullish over the last decade, Bernstein turned cautious earlier this year, warning pockets of the US market were in bubble territory. Last week, Bernstein accepted that timing the market peak is an impossible task, but there is a “prudent alternative”.

Bernstein’s take is that bubbles attract an overabundance of capital, resulting in investment opportunities in other capital-starved areas of the market.

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Not everything is currently bubbly: since the end of 2018, only three of 11 global sectors (technology, communication services and consumer discretionary) have outperformed the MSCI All Country World Index.

Over the long term, Bernstein argues, reducing exposure too early need not be a concern. If you sold technology and bought the “anti-bubble” sectors in 1997 – three years before the dotcom bubble burst – you would have enjoyed superior returns within two, three, four and five years of the market trough.

Is this time different? Maybe. Value stocks are not as cheap as they were in the late 1990s, while growth investors argue disruptive companies like Tesla merit elevated valuations.

However, Bernstein says long-term investors tempted to rotate out of expensive sectors shouldn’t worry about getting out too early. “Timing a bubble,” says Bernstein, “may be easier than you think.”