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Managing valuation risk

When overvalued markets fall, losses can be enormous. But there is a simple way of mitigating them.
Managing valuation risk

Many of you are worried about the high valuations of some US tech stocks such as Tesla. There’s not much point debating whether they really are overvalued, because even overvalued shares can continue rising just as undervalued ones can continue falling. Instead, we should ask how best to manage the risks here.

And they are big risks, because when overvalued shares fall they can fall a lot. When the tech bubble of the late 1990s deflated the Nasdaq composite index lost 75 per cent and did not return to its February 2000 peak until late 2014. The UK’s experience was even worse: the FTSE IT sector lost 95 per cent when the bubble burst and even today is only half its 2000 peak.

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