The stock and bond markets have been on a tear for the past decade, with the S&P 500 nearly doubling since 2009 and bonds delivering even higher returns. While investors have enjoyed these exceptional returns, many are beginning to worry that “irrational exuberance” may have pushed prices too far and the market may be due for a reversal. It is easy to be lulled into complacency by the stellar returns of the current bull market, but it is important to remember that markets operate on cycles of ebb and flow. Looking back at prior bull markets, it is clear that periods of exuberance have been followed by significant corrections, often driven by speculative mania. Market corrections are typically associated with an unusual level of speculation as investors chase “hot” stocks and push prices beyond their underlying value. This can lead to a bubble in certain asset classes or sectors that eventually burst. Furthermore, stock and bond prices can be driven up or down by investor sentiment and macroeconomic factors. Given the current market environment, there are numerous potential triggers that could initiate a correction in the stock and bond markets. These include a rapid rise in interest rates, a sudden increase in inflation, a downgrade to company credit ratings or a geopolitical event. The good news is that there are proactive steps investors can take to prepare for the possibility of a market reversal. The first is to stay diversified and avoid unduly concentrating investments in individual stocks or asset classes. Investors should also make sure their portfolios are appropriately balanced with the right mix of stocks, bonds and cash. Another strategy is to consider hedging by using a variety of derivative instruments to partially offset the impact of a market correction. By using derivatives, investors can still benefit from upside moves in the markets while also hedging against losses. Finally, investors should maintain a long-term perspective and focus on their long-term investing goals. A market correction can be a contrarian opportunity to buy quality investments at discounted prices. In other words, what may seem like an irrational exuberance now may turn out to be a buying opportunity in the future.