Like the housing-market bubble that burst in 2008, and the dot-com bubble of 1999, the swell-and-burst scenario is actually fairly common. But not pleasant. Burst bubbles have a wide impact on the overall economy. Now, experts are discussing whether the current environment is ripe for a bubble.
Market bubbles occur when an economy or market has become unbalanced due to a flawed outlook – as it was in the 1990s when investors were excessively bullish about technology stock, driving their prices to levels that did not reflect reality.
According to brokerage firm Charles Schwab, the four most likely bubbles to occur today are cryptocurrencies (such as bitcoin); volatility; Internet retailers; and central-bank assets. Pointing to the yield curve, which has historically detected bubbles about to burst, Schwab suggests there is a relatively modest risk of a bear market during the next 12 months.
There are many factors that influence markets, including Federal Reserve policy and inflation. These and other factors can impact investors’ comfort levels, meaning they’re more likely to try to reduce investment risk. Diversification is one popular option among investors who are concerned about an impending bubble. Most believe that diversification may provide protection in the event of a bear market; diversifying into stocks, bonds, cash, and possibly real estate and commodities may smooth out the highs and lows.
If you’re concerned about the potential for an upcoming bubble, discuss it with your advisor. He or she is close to the action and may know better than others what’s happening now and in the future.