Financial fixes: Beware of market bubbles
Centuries before the crash of 1929, the dot-com bust, and cryptocurrency, there was the tulip bulb in the Netherlands. 1 In the 1600s, the country’s emerging middle class began to fawn over the flora and display tulips to show wealth. But the flowers could only be sold for a short time every year. As a result, in the off-season, people began to speculate on the bulbs’ future prices. It became a mania, and then crashed when no bidders showed up for the 1637 tulip auction.
A bubble for every era
Through the lens of history, we know this was an early market bubble, and as the saying attributed to George Santayana promises, “Those who cannot learn from history are doomed to repeat it.” Yet people continue to lose money on the next big thing with every business cycle, from subprime bubbles, to tech bubbles, to housing bubbles.
Trouble in the bubble
Market bubbles develop when a product’s price exceeds its real value. As more people get excited about a new product or company, they talk about it. Soon market speculation gains momentum and inflates the original price of the subject at hand. The product likely hasn’t changed, but people’s perception of it has. It’s human nature to want to be a part of the next big thing, but we have to ask, what is real value here? It’s important to pay attention to what’s happening in the marketplace and be ready to make the decision to hold your position or sell. Are you able to do this and separate your emotion from your necessary action?
The efficient frontier
For a long time, the common line of thought was “higher risk, higher return” and “lower risk, lower return.” This changed in the 1950s, when economist Harry Markowitz won the Nobel Prize in Economics for defining the efficient frontier. In essence, this theory states that every investment portfolio has a place of balance where the optimal level of return meets the optimal level of risk. Markowitz’s work became the basis for modern portfolio management, and it’s still in practice today. A financial representative can work with investors at any life stage to achieve this balance in their financial portfolio.
Invest in terms of time
Choosing to invest is a big step. You are looking for growth but may have to accept that it comes with some level of risk. Also, time needs to be considered when it comes to investing. Consider this: have you ever been stuck in traffic, switched to a lane that looked to be moving, only to get stuck again? That’s what happens to our money when we constantly trade out old investments for new ones. It’s tempting to try and time the market. But, while weaving in and out of the lanes may feel like a lot movement, it stops investors from really getting anywhere. Further, looking at the Dow Jones Industrial Average over time, there’s never been a 20-year period when it did not grow. 2 When you need to access those dollars most, and it’s a down market it could have an impact on your total portfolio, timing is everything and you can’t predict it.
Invest in your life
Balance and diversification matters. Rather than tying all your money up in unpredictable things like the tulip or tech market, think about other ways your money could work for you. It’s all about a balanced financial portfolio. For instance, adding whole life insurance could be beneficial to your overall portfolio. While most people know that whole life exists to provide a death benefit, it also has many additional benefits such as a cash value3 component that grows over time no matter what happens in the stock market. This cash value, that grows tax-deferred,4 is the amount accumulated over time, through the premium payments you must make and, although not guaranteed, through the dividends paid into your policy.5 The presence of cash value helps make whole life insurance a strong asset for diversifying your financial portfolio.6 This is just one example of other products to consider that may make up your portfolio.
Do the research
While you may love your favorite website, that’s not a sufficient reason to invest in the parent company. Especially as technology creates highly sophisticated products, it’s important to work with a financial representative who thoroughly understands potential investments.
A financial professional can serve as a buffer between you and the market, so you don’t jump in and make costly emotional decisions, but rather rely on tried and true practices outlined here. Sure, it’s human nature to want long-term financial confidence — in a flash. But, there are ways to approach investing that can soften the blow of a bubble.
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2021-120960 Exp. 6/23