It's not too often that you hear officials from the Reserve Bank of Australia (RBA) talking in such excitable language, however, this week's comment by Assistant Governor Guy Debelle that markets could be headed for a "violent sell-off" will have investors sitting-up and taking notice.
Of note, Debelle made mention of the mispricing of risk and he effectively suggested that many investors are playing the 'greater fool theory' – which assumes there will be someone prepared to buy your overpriced stock at an even more exorbitant price in the future.
The recent whip-saw movements in the S&P/ASX 200 (INDEXASX: XJO) suggest that markets are perhaps starting to wake up to the concerns of Mr Debelle, however, the picture he paints would suggest this is but a taste of things to come.
Economists have successfully predicted 9 out of the last 5 recessions!
It's not always worth listening to the doomsayers and experts when it comes to predictions of market crashes, however, it can be useful as an investor to understand where in the market cycle you are standing. Currently share markets in Australia and the USA are still near multi-year highs and could be described as having been on bull runs ever since early 2009.
That scenario, overlaid with the unprecedented low interest rate environment, could suggest it's time investors consider if their portfolio offers adequate protection against the down-side. If you only own richly priced, speculative growth stocks you perhaps have cause for concern!
At present, owning some tried-and-true quality blue-chip businesses, that pay sustainable fully franked dividends such as Woolworths Limited (ASX: WOW) and Telstra Corporation Ltd (ASX: TLS) looks like a sensible strategy given market uncertainties.
