Investment Strategy

When Markets Feel Like a Bubble: What Should Investors Do?

The word ‘bubble’ is everywhere again. Three centuries ago, Sir Isaac Newton—one of history’s greatest minds —was an early investor in the South Sea Company. He rode the shares up, sold, and pocketed a handsome profit. But as the stock kept climbing and those around him grew rich, he bought back in near the peak with a large share of his wealth and lost it all. His verdict, as it is often recounted, has echoed ever since: “I can calculate the motions of the heavenly bodies, but not the madness of people.”

Three hundred years later, we may understand Newton’s law of gravity a little better, but certain things haven’t changed. In early 2021, a single stock—GameStop—rocketed from around $20 to more than $450 in a matter of weeks,¹ propelled not by earnings but by social media and the sight of others getting rich fast. This is FOMO—the fear of missing out—in its purest financial form: the anxiety of watching others profit becomes stronger than the discipline to stay grounded in fundamentals. Many piled in near the top, and when it collapsed just as quickly, they were left holding the losses. Different eras, different assets, but a familiar story.

Whenever markets rise sharply around a powerful investment theme, the same question returns: how far is too far? Headlines can turn increasingly cautious as investors begin questioning whether prices have outrun fundamentals, and the temptation grows to step aside before the inevitable correction.

That anxiety is not irrational. Throughout history, there have been periods when prices became difficult to justify against underlying fundamentals. Some ended in painful corrections; others took years to unwind.

This piece takes no view on whether today's market is one of them. That call is notoriously unreliable in real time, even for professionals. That said, regardless of whether current market optimism does or does not prove to be a bubble, we believe there remains genuine value in the AI (artificial intelligence) thesis and opportunities to continue benefiting from the trend.

The more useful question, and the one we focus on here, is how to stay exposed to that opportunity while managing the risks that come with it. To do so, it helps to understand what a bubble is, how it forms and why it has caught even the most brilliant investors for centuries.

There is always something to worry about

But investors who have stayed the course have benefitted from growth, innovation, and progress

Source: J.P. Morgan, FactSet. [1] Cumulative total returns for the 60/40 portfolio (Net total return for MSCI World and Bloomberg Global Aggregate Bond Index) are calculated from December 31 of the year prior until the updated data. Data as of August 31, 2026.

Despite Intra-year Swings, Equities Tend To Reward Investors Over Time

S&P 500 intra-year declines (max drawdowns) & calendar year price returns

Source: Bloomberg Finance L.P., Standard & Poor’s, J.P. Morgan Asset Management - Guide to the Markets. Data as of August 31, 2026. Note: Returns are based on price index only and do not include dividends. Intra-year drawdowns refer to the largest market declines from a peak to a trough during the year. Return shown are calendar year returns from 1986 to present year.

What makes a bubble?

A bubble occurs when asset prices become hard to justify by fundamentals and depend increasingly on the belief that someone else will pay more later.

Most follow a recognizable progression. A genuine opportunity emerges, prices rise, success stories draw in more capital, momentum reinforces belief and valuations stretch—until new buyers become essential to sustaining prices, the flow of new money slows and the cycle reverses.

Financial history is full of episodes that looked different on the surface but shared familiar characteristics:

Tulip mania (Holland, 1630s). At the 1637 peak, a single prized bulb could fetch a skilled worker's annual salary — occasionally the price of a house. Then, almost overnight, buyers vanished and fortunes evaporated.
The South Sea Bubble (Britain, 1720). A company with grand claims and thin substance saw its shares bid into the stratosphere before crashing.
The Crash of 1929. The boom of the Roaring Twenties gave way to the Great Depression and the modern regulatory era.
The Japanese Bubble (1980s). At the peak, the land under Tokyo's Imperial Palace was reputedly worth more than all of California.² The Nikkei then fell ~60% into 1992, land values ~70%³, and Japan entered its "Lost Decade."
The dot-com bubble (2000). This peaked at more than $1 trillion in value, before losing nearly all of it within a couple of years.

The U.S. housing bubble (2007–09). This triggered the worst financial crisis since the Depression.

Most bubbles begin with a kernel of truth

Railways did transform commerce, the internet did change the global economy, housing is a vital economic asset and Japan really was an extraordinary success before its late-1980s boom. But a genuine opportunity says nothing about whether the price being paid for it is reasonable—and that distinction is one of the most important lessons in financial history. ‘Is the opportunity real?’ and ‘is it attractively priced?’ are different questions.

The details change, but the pattern doesn't

The progression above has repeated for four centuries, but each episode leaves behind a distinct lesson:

Japan: recoveries are not always swift.
The Nikkei peaked in late 1989 and fell roughly 60% to its mid-1992 low—and remained far below that peak for decades. Time heals, but not always on a schedule that suits an investor.
Dot-com: being right about the technology is not enough.
The internet was genuinely transformative, yet many "new economy" companies were priced for growth that proved impossible to deliver. The technology survived; many of the valuations did not.
The Global Financial Crisis: leverage changes everything.
Excesses in housing and credit did not stay confined to one asset class. Rather, borrowed money turned a price correction into a systemic crisis. When companies, banks or investors are heavily leveraged, a contained correction becomes a cascade. How a position is financed can matter as much as what is owned.

The common thread here is humbling. Knowing a bubble may exist tells you little about when it will burst, how far it will run first or what the right response is. That uncertainty—not the bubble itself—is the real problem to solve. And because you can be right about the long run yet still be forced to sell at the worst possible moment, being early can cost as much as being wrong.

The behavioral science: Wired to chase

Even the most experienced and sophisticated investors participate in bubbles. According to behavioral science, this is for very understandable reasons:

Herding. Every bubble attracts new participants convinced that rising prices are a self-fulfilling prophecy. When respected investors, competitors and headlines all lean the same way, following the crowd feels safe even when it isn't.
Recency bias. A few years of spectacular returns get silently extrapolated into permanent trends. The lessons of past fade under the passions of the present.
Confirmation bias. Incoming research, data and signals are interpreted to support our existing beliefs. Bulls get more bullish, bears get more bearish and both walk away more certain and less informed.
Narrative over numbers. We are prone to emotion triggering narratives. In past manias, investors drifted toward story-based proxies for value—during the dot-com bubble, companies went public with no revenues at all.

Intelligence does not immunize investors against behavior. Once an investment becomes something discussed with colleagues, friends, the media—and increasingly people who don't normally invest—the price itself becomes part of the story.

So, bubbles are not simply periods of irrationality; they are periods in which reasonable beliefs are amplified by momentum, social reinforcement and extrapolation. And momentum can persist far longer than logic suggests. This is the hard truth behind the market adage, often attributed to John Maynard Keynes, that “the market can remain irrational longer than you can stay solvent.” Being right about a bubble is not the same as being able to profit from it.

Knowing isn't the same as doing

Valuation is only one sign of a stretched market—sentiment, leverage and a rush of new issuance often say more. But it is the one that investors reach for first, and the one that most often misleads them. The uncomfortable truth is that conviction alone doesn't help you, and acting on it is far harder than it looks.

Investors often treat an all-time high as evidence that markets have become too expensive. Psychologically this makes sense, as buying after a long rise feels less comfortable than buying after a fall. But the historical data do not support the idea that a record high is, on its own, a reason to wait. The investor who keeps holding out for a better entry may get the pullback they want, or may only get it after the market has climbed substantially higher first.

For an investor who correctly senses that valuations are stretched, they face a harder second question—not just when to get out, but when to get back in. Selling to cash feels safe while markets fall, but the market never rings a bell to signal the danger has passed, and recoveries often begin while the data still look poor, earnings are under pressure and the headlines are bleak. Volatility is not a bug in the market, it is a feature. It is the very mechanism through which markets reprice risk, reward patient capital and ultimately deliver the long-term returns that disciplined investors are compensated for enduring.

It’s about time in the market, not timing the market

Annualized performance of a $10,000 investment over the past 20 years

Source: J.P. Morgan Asset Management analysis using data from Morningstar Direct. Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Past performance is not indicative of future returns. An individual cannot invest directly in an index. Analysis is based on the J.P. Morgan Asset Management Guide to Retirement. Data as of August 31, 2026.

Cash only often feels riskless. However, over time, it is simply a different risk—the slow, compounding loss of purchasing power. “Waiting in cash for the crash” carries a real cost every year the crash doesn't come.

Equities and fixed income have outperformed cash

Growth of $100 in various assets and inflation from 1995

Source: Bloomberg Finance L.P., J.P. Morgan Asset Management - 2026 Long-term Capital Market Assumptions (LTCMAs). Global equities represented by MSCI World USD Total Return Index, U.S core fixed income by Bloomberg U.S. Investment Grade Bond Index, U.S. Treasury Bills by FTSE 3 Month Treasury Bill Local Currency, U.S. Inflation by U.S. Consumer Price Index (Urban Consumers) NSA. Historical data as of August 31, 2026. LTCMA projections as of September 30, 2025.

A recovery can begin while economic data still look poor, earnings remain under pressure, and headlines remain negative, which is precisely why the investor waiting for an ‘all clear’ so often misses it.

What if you have terrible timing anyway?

It is worth testing the fear directly. Imagine three investors, each putting the same $1,000 to work on seven separate occasions between 1990 and 2022.

The first has impossibly bad luck. Every single one of her seven investments lands at a market peak, immediately before a major global downturn: just before Japan's bubble burst in 1990, before the Russian debt default and LTCM collapse in 1998, before the dot-com crash in 2000, before the Global Financial Crisis in 2007, before the late-2018 selloff, before the COVID crash in February 2020, and before the 2022 inflation shock.

Call her the Unluckiest Investor—she could not have chosen worse moments.

The second has perfect foresight, buying instead at the exact low of each of those same downturns—the Luckiest Investor.

The third avoids the stress of markets altogether, investing the same amounts on the same dates as the Unluckiest Investor, but holding cash (short-term Treasury bills) throughout.

Even the worst-timed investor beat cash

MSCI World Index (USD): investing at market peaks, at market lows, or staying in cash

Source: Bloomberg; LSEG Workspace. The analysis uses daily MSCI World Price Index (USD) data and the Bloomberg U.S. Treasury 1–3 Month Treasury Bill Index as the cash benchmark. Major market drawdowns were identified using a systematic screening approach in which a drawdown was triggered when MSCI World fell at least 20% from its rolling one-year high. Following this screening, seven distinct market-stress periods were selected. The Unluckiest Investor assumes seven hypothetical $1,000 investments made at selected market peaks immediately before these drawdowns, while the Luckiest Investor invests $1,000 at the lowest MSCI World index level reached during each corresponding drawdown period. The Cash Investor invests $1,000 on the same dates as the Unluckiest Investor, with the first contribution made on 31 December 1991. Each portfolio is compounded daily using the relevant index returns, with $7,000 of total hypothetical contributions for each investor. Note: The chart begins on 31 December 1991, the earliest date available for all three series; the MSCI World portfolios therefore retain the value accumulated from investments made before this date. The analysis is hypothetical and excludes fees, taxes and transaction costs.

By the end of August 2026, the results are striking. Each investor had contributed the same $7,000. Perfect timing, of course, won: the Luckiest Investor's stake grew to about $39,024—or roughly 5.6 times the amount invested.

But the part that matters is what happened to the worst-timed investor of all. The Unluckiest Investor, who bought at every single peak, before every single crash, still ended with roughly $25,207, or about 3.6× her contributions.

Meanwhile, for the investor who played it ‘safe’ in cash, they earned just $10,881—barely 1.6 times the initial investment—and less than half of what even the worst-timed equity investor achieved.

The lesson is not that timing doesn't matter—clearly, buying low beats buying high. Instead, it is that being invested mattered far more than timing it well. The Unluckiest Investor was wrong about the timing every time, and still came out well ahead, because she stayed in the market and let time do the work. The Cash Investor avoided every drawdown—and paid for that comfort with the poorest outcome of all.

The implication is not complacency; it is disciplined. A long-term investor does not need to predict peaks to succeed. Even the worst imaginable entry points were overcome simply by staying invested over a long enough horizon.

Over the past 32 years there has never been a negative annualized S&P 500 return, if held for at least 11 years

S&P 500 annualized return

Source: Bloomberg Finance L.P. Data as of December 31, 2025.

What should a long-term investor do?

The more durable response to a possible bubble is not to predict risk but manage it through three habits. These may sound simple, but are deceptively hard to hold: don't retreat to cash out of fear, stay invested and diversify deliberately. The first two we have already seen, as cash erodes purchasing power and staying invested beats sitting in cash in every scenario above. The third—to ‘diversify’—is the one most often repeated, yet least understood.

Diversification has become one of the most overused words in investing. In practice, it means something different for almost everyone, depending on their goals, their wealth, their career and their stage of life.

For a young saver, it means not betting everything on the one theme that happens to be soaring. For a business owner whose fortune is tied up in one company, it may mean building income outside that business, while for a senior executive it could mean ensuring sure the portfolio doesn't simply mirror the industry that already pays their salary. The word is the same, but the requirements are not.

That is where goals-based planning can provide the word real meaning. Rather than ‘diversified’ as a vague virtue, it asks what each pot of money is for, and the answer can point in different directions.

For money you will need soon calls for protection. This offers stability and access, where cash and short-term bonds belong by design, not fear.
For money you will need in the coming years or decades, it means not letting any single theme decide your outcome. Here, the risk is not volatility but concentration, and spreading across styles, sizes, geographies and asset classes is what lets this money ride through bubbles, rather than depend on calling them.
For money meant to outlive you, it can take more risk. This is because over the longest horizon, the enemy is not a drawdown but being too cautious for too long.

If you are truly diversified, something you own will always be lagging. If everything rises together, it signifies you are not. It means that the cost of protection is often the temporary underperformance of a lagging asset. That discipline is hardest to maintain during a bubble, when everything outside the prevailing market trends appears misguided, precisely when the temptation to abandon it is greatest.

Diversification, properly understood, is about where your wealth comes from, not simply what you own.

When your salary, company equity, and portfolio are all based around the same theme—especially one the market has bid up—a correction hits your income, net worth and investments at once. A portfolio full of different stocks can look diversified on paper, while remaining exposed to the very theme everyone is worried about. Your portfolio's job is to be a ballast—not to double down.

What if you already own it?

For many, the real question is not ‘is the market a bubble?’, but instead ‘what do I do about a large position I already hold in the thing everyone is worried about?’

You don't need a view on the bubble to answer it, but focus on one thing: is this position a larger share of your future than you would ever deliberately choose? Concentration that arrived by accident, from a holding that simply grew, is very different from one you would build today.

Most people, asked whether they'd put that share of their net worth into a single position from scratch, would say no, and that gap is what to manage. This may not mean a dramatic exit. You can trim toward the weight you'd actually choose, redirect new capital rather than sell into a tax bill and—perhaps the one hard line—never hold a concentrated position on leverage, which is how being right about the long run still ends in being forced to sell at the worst possible moment.

None of this requires predicting the burst. It simply ensures that if a correction comes, it lands on a position sized to your plan—not one large enough to derail it. The tax, liquidity and timing questions are exactly the conversation to have with your advisor.

A plan that doesn't need a forecast

This demonstrates the power of goals-based planning. By dividing wealth into distinct buckets—liquidity, lifestyle, legacy and perpetual growth—each with its own purpose and time horizon, it turns behavior to your advantage.

When each bucket of wealth has its own mission, the volatility of the long-term assets stops feeling like a threat to the near-term ones. The money you need soon is protected, while the money meant to grow is free to fluctuate on its way to compounding. Staying the course becomes far easier because you are no longer asking the market to behave.

The useful question, therefore, was never ‘Will the bubble burst?’ or ‘Can I get out in time?’ Instead, the real question is ‘What does each part of this portfolio need to achieve, and is it built to get there through whatever the market does?’

Bubbles will keep forming—human nature guarantees it. But what separates the investors who endure is not a sharper ability to call the top, but a plan robust enough that they never have to.

FAQs

Why do bubbles often begin with a kernel of truth?

How can rules-based rebalancing reduce bubble risk?

How can investors reduce leverage and forced-selling risk?

How can investors spot hidden concentrations in a portfolio?

Why does the bubble pattern repeat across different markets?

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