I’ve been asked if we’re in an investment bubble. One thing about bubbles, it’s really hard to tell if you’re in one until it bursts. And then, you want to grab your rubber ducky and remember this is why you have your portfolio well diversified to manage market dips and turns.
I’m reminded of one of the early examples of a market bubble. You may have heard of the Great Tulip Bubble in the Netherlands in the 1600’s. At the time, tulips were just being introduced to Europe from Turkey. They were unlike any other flower available. A new craze was on. Tulips take a while to grow. During the winter season, traders bid up the prices of different varieties. Eventually, the cost of some tulip bulbs was many multiples of a year’s salary at the time. Prices then dropped suddenly when buyers stopped showing up to purchase tulips at such a high price. The market corrected itself. And now I can buy a few tulip bulbs and hope they bloom before the deer come along and eat them each spring.
Markets are an extension of people and we tend to get very excited about things. Tulips, infrastructure projects, you name it, we get excited and prices go up. Then they go back down again to somewhere near where they belong. Sometimes they stay up or down for a surprisingly long time. So far, no one has been able to predict when markets will go up or down with any consistency (that’s like trying to predict the mood of a teenager). Knowing that, it’s wise to do a couple of things to protect your investments:
- Invest in more than tulip bulbs. In other words, diversify your investments. There is usually some part of the market that swings up when other things swing down.
- Be prepared for winter when the flowers don’t bloom. We call this investing with a timeline. Make sure you have cash available for short term needs, conservative or balanced investments for medium term needs, and leave your growth investments for long term goals so they have time to go up and down when you don’t need to draw on them.
So are we in a bubble? I really don’t know. Either way, the tulips will bloom and we’ll be ready to manage whatever the markets do with a well-devised plan.