Young & Invested: 3 things ETF investors can do in a market bubble
Managing risk when valuations run hot.
Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.
This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 41
It seems like the finance industry can’t stop talking about bubbles.
Several experts have come out of the woodwork warning of an impending market crash. Every tiny wobble is quickly framed as an existential soliloquy. It’s all very Shakespearean. And that’s coming from someone who regularly skipped that class in favour of lunch.
So, what exactly is a market bubble? Simply put, people perceive a bubble occurring if asset prices rise far beyond their fundamental value. This is often driven by hype, speculation or herd behaviour. Current concerns about steep valuations and increasing concentration in both the US and domestic market are driving this conversation.
But I’m not here to speculate on whether the bubble exists or when it will burst, my colleagues recently had a conversation about it here. And I also don’t want this to turn into another reactionary “position your portfolio like this for the iMpendiNG cRAsh!” piece. As young investors, we take a lot for granted. Chief among these are the solid returns and reasonably short bear markets we’ve experienced over the past decade or so.
I recently stumbled across a post that likened passive investing to the rise of anti-intellectualism. Besides being mildly offended, I had to laugh. Moments of market unease are exactly when active managers sharpen their pitch. They know fear sells. But I can say with reasonable confidence that the antidote is not whatever product they’re selling you.
Passive investing doesn’t imply inaction or complete ignorance. It’s not about blindly handing over your future to index committees. It’s about discipline, cost efficiency and healthy perspective. Below are a few things to consider amidst the chatter.
Take the time to rebalance
When markets run hot and valuations appear stretched, rebalancing is an effective tool to keep your portfolio in check. Over time, the relative performance of asset classes can reshape your asset allocation in ways that no longer reflect your risk tolerance or capacity.
For example, the chart below demonstrates how asset allocation changes over time without rebalancing. Consider an intentional 50/50 growth and defensive split across Aussie equities and bonds. Over the past decade, that allocation would have drifted to around 65/35 if left alone. If we take global equities instead, the imbalance is even more dramatic at 75/25.
Source: Minchin Moore Private Wealth. 2025.
In today’s context, the S&P 500 has surged around 15% year to date while the ASX 200 is up around 5.5%. Naturally, this has implications for investors.
When in a bubble or recent run up, the temptation is to let the winners ride. But this can leave you dangerously overweight in the assets that may be most vulnerable to a correction. There is no guarantee that yesterday’s winners will continue to win. This is where rebalancing comes in.
The process enforces discipline by requiring you to realign your portfolio with your long-term goals and risk tolerance, rather than letting momentum dictate your exposure. Importantly, this isn’t something we do to predict crashes or tactically time exposure. In fact, trimming outperforming asset classes may come at the opportunity cost of missing out on continued gains.
But nobody can consistently predict market movements. The idea is grounded in controlling for risk and re-asserting confidence in your original investment thesis. In practice, this can be done through scheduled intervals or threshold triggers. I wrote more on the process in this article.
Load up on dry powder?
During times like these, you’ll notice an excess of shiny new products popping up. Many of them are designed to exploit our worst investment fears. They may be marketed as bubble-proof alternatives or essential hedging strategies. The problem is that many of them are built in reaction to prevailing market sentiment, whether it’s fear or greed. I’ve previously written about the perils of such ETFs here.
Against this backdrop, the idea of simply holding cash can seem appealing, especially for risk averse investors or those with near term capital needs. Many reference keeping a Buffett style dry powder stash to deploy when things ‘inevitably’ take a turn for the worse. Ironically, Buffett is the only 93-year-old we question for holding cash. In reality, it’s not a bad asset allocation decision for someone of his age.
It also pays to remember that cash has the lowest long-term returns of any asset class. It’s certainly not suited to a growth-oriented investor. While it can protect capital and position you for opportunity after a correction, there is a significant trade off. Markets may continue to irrationally push higher while idle cash earns you a negligible return. It’s the definition of market timing, which history shows is a terrible long-term strategy.
Of course there is nuance. Holding cash doesn’t always imply you’re trying to predict the top. If it aligns with your strategy, withdrawal requirements or risk tolerance, it can be used to manage risk and ensure you’re still on track to meet your goals.
Touch some grass
Sometimes the best advice in a bubble isn’t looking for another chart or forecast, but a healthy dose of perspective. As an avid lurker of online forums, I’ve learned that investors love to catastrophise every uptick in market concentration or valuation as a doomsday signal. But is any of this noise genuinely helpful? Sometimes it pays to step back and take a holistic view.
A common chorus we hear is that index funds will be hit hardest in a downturn because they ‘blindly buy’ without considering valuation. When markets like the S&P 500 and ASX 200 are overly top-heavy with many big names trading well above their fair value estimates, the fear is obvious: what happens if these giants tumble? Whilst the argument might have some merit, I’m not sure the situation for all investors is as dire as it seems.
I recently ran my portfolio (2 ETFs plus a single company) through Sharesight using their exposure report function. It concluded that no single company accounted for more than 4% of my holdings. That’s hardly an outrageous or portfolio decimating level of concentration. Especially when compared to the portfolio composition most stock pickers are sporting. Before buying into the narrative that index funds automatically doom you into failure, it’s worth touching some grass and checking the actual numbers.
Yes, valuations are stretched by historical standards, and yes, select global equities may deliver lower returns in the years ahead. But investors with longer time horizons need not panic or perform a strategy overhaul. When we’re at inflection points it’s easy to overstate the need to make a dramatic, reactive move, just to feel like we’re reasserting control. We see evidence of this in the herds outside local bullion dealers.
Holistically our portfolios are more than a handful of large cap stocks. We have super, cash buffers, maybe property and the salaried income. Returns don’t come from being smarter than everybody else through ever-changing tactical shifts. Returns come from accepting risk and staying disciplined.
