For those unfamiliar, the Japanese stock and property markets by 1989 had run up to absurd valuations (the Nikkei 225 hit a Shiller CAPE of 80) and then collapsed, never to recover. I used to think this massive bubble proved you can’t just buy and hold ignoring all fundamentals and valuations, but recently came across this: ritholtz.com/2017/10/japan-greatest-bubble-time/
Never underestimate how far people can take the markets to the extremes. This works in both directions. The pendulum swings back and forth but always seems to go further than most would assume is possible.
Valuations don’t work as a timing tool. If you tried to use them in Japan you probably would have gotten out of the market a decade before the peak. It’s easy to say this in hindsight, but there were few scenarios where the late-1980s real estate and stock market valuations could have been validated going forward.
Diversification, as always, is the key to avoiding a blow-up. The entire point of diversification is to avoid having your entire portfolio in a Japan situation. The global stock market has done just fine since 1990 even when you include Japan in the results.
Other assets you might’ve deiversified into that would’ve saved you: Japanese government bonds, Japanese small cap and value stocks (the Nikkei 225, as name suggests, only has mega caps), and foreign real estate.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.