Is another GFC crash coming?

The S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) gained a very credible 12.4% for the 2014 financial year. In doing so it brought the total gains in the index to 38% over the past five years.

The run in global stock markets since the global financial crisis (GFC) has been nothing short of spectacular – particularly for the epicentre of the crisis, the USA where its markets are hitting new all-time highs.

With Australian investors now turning their attention to the new financial year it is prudent timing to read the concerns of the Swiss-based Bank of Financial Settlements (BIS). Numerous reports this week are quoting warnings from the BIS that: “Financial markets have been exuberant over the past year.” What’s more, the BIS is calling for central banks to raise rates to more normal levels and reign in the “euphoric” state of markets.

The language used by the BIS is strong and suggests the bank is concerned that another GFC-style crash could be in the making. So what are the chances that at some point in the future there will be another big stock market crash?

There will almost certainly be a crash! But there’s no need to worry!

The people who really need to worry about stock market crashes are speculators. If your game is to buy a stock simply in the hope of selling it to someone else at a higher price, then yes, OK, be worried!

However if you use the market as a place to buy a part share in a business at a reasonable price then in the long-term things can turn out just fine. Consider investors in Macquarie Group Ltd (ASX: MQG). With the exception of those who got swept up in the exuberance and paid up to $100 a share for its shares in 2007, most shareholders would today with the stock trading at $60 be in a reasonable position despite the price crashing to less than $20 in 2009.

In other words, the best way to survive is to not overpay.

As the BIS is warning, the current low interest rate climate and low growth environment has investors clambering for high yielding stocks and high growth stocks. This is arguably creating a bubble with buyers pushing up the prices of already fully priced stocks into overpriced, expensive territory.

In the recent past analysts have warned that this situation could be facing a number of widely owned stocks including Commonwealth Bank of Australia (ASX: CBA), Domino’s Pizza Enterprises Ltd. (ASX: DMP) and REA Group Limited (ASX: REA).

Overpaying rarely pays off!

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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