1. Your money keeps going up
2. The overall market is going up
3. But there is no fundamental reason
4. You think about it for a second
5. Don’t question it too much because you have money eyes
6. Pop some champagne #livinglikearockstar
7. But soon no one could predict it bursts
8. The market starts to go down
9. You are scared and angry
10. This all equals a bubble
Let's piece this together
Your money keeps going up and up and overall the market is going up as well, but there is no analysis that supports why the market is exceeding expectations. You think about this for a second but don’t question it too much because you are living like a rockstar popping champagne. Soon no one could predict when but the market “burst” and the market start to go down, all of sudden your celebration turns into panic and anger. This all equals a bubble.
What is a Bubble?
This is an economic term to describe when assets ascend rapidly and then fall once a market reaches a “peak”. This is created by a surge in assets and unusual behavior by investors as there is no fundamental analysis proving why the assets are ascending so quickly. When the market reaches its peaks and all investors are skeptical then a sell-off will occur creating a decline or a “burst”
Current Situation as of November 2017
Market: The Dow Jones is at an all-time high, as well as our overall markets, skeptics are warning that this could be a potential bubble but the ascent of the current bull market does not seem to be running out of steam yet, there have been great financial numbers supporting the rise of stocks but as in any market rising market speculators are cautious.
Bitcoin: Cryptocurrencies especially Bitcoin have been on a hot streak lately, with bitcoin recently toppling $10,000. But what is there to support this? there is not much inherent value being given to why it is worth this much which is why skeptics are calling it a bubble because there is no fundamental analysis to support the current value. But as long as the demand stays then Bitcoin will continue to see gains and only time will tell to see what will happen
How should you react?
It is key in times like these to work with a professional who understands the risks involved with investing in such a market. You should always invest the same as your normal investing style and never fall victim to FOMO, Greed, or Fear. These are the factors that drive markets and often lead to investors being burned especially when it comes to a bubble
Never fear missing out on an opportunity, the best time to plant a tree is yesterday, remember investing is a process, not an omg I should have got into this today because look it doubled in a week.
Greed: Never get caught up in the bullish market going up and up, if you are invested and feel comfortable with your risk exposure then leave it at that, never put your eggs in one basket just because something seems to be doing well.
Fear: Never live in fear that the bubble will burst tomorrow, or that you will lose all your money, work with a professional to understand the risk and who will help move your money when or if a bubble happens to make sure you do not keep yourself exposed. Not get into the market because of fear, at the end of the day, everything can be customized to your risk profile.
Tulipomania: In Holland in the 16th century, Yes Tulips the flowers, people in Holland created a futures market for buds and this rapidly ascended almost as much as bitcoin is today. But burst when buyers failed to show up with tulips even though contracts were signed. Essentially collapsing Hollands economy. Who would Tulip it?
Housing: We are all familiar with this one, the great 2008 housing market bubble, where mortgages were being given out but were not being paid by the consumers. This essentially reckoned the US market
Tech Bubble: The original tech bubble was the heyday of Silicon Valley where companies like Microsoft and Broadcom went IPO and their stock climbed to new levels. Eventually, speculation became correct as earnings slowed down and the market took a dive when investors started to do sell-offs.
Remember bubbles happen, but things will always go up and down, investment should be thought as for more than a year and a long-term commitment ride the waves like an orca and don’t act based on Fear or Greed of any kind.