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What is an Investing Bubble?

If you read financial blogs, you may occasionally come across posts that claim to have found the “next big thing.” […]

If you read financial blogs, you may occasionally come across posts that claim to have found the “next big thing.” Unfortunately, the next big thing can come and go in a short period of time, leaving you with a loss. A recent example is Bitcoin. Bitcoins soared to over $250 per Bitcoin, but just as quickly lost over 75% of their value. Those that invested in the digital currency later in the upward climb suffered a major loss. The hype, and short lived success, is what’s known as an investing bubble.

What Is an Investing Bubble?

An investing bubble is when there is a huge spike in the price of an asset (stock, precious metal, etc), despite the intrinsic value of the asset varying from the increased hype. As mentioned above, investors went nuts over Bitcoins and in a matter of weeks the price shot up to over $250 per Bitcoin. The very next day, the price fell over 75-percent. People were claiming that Bitcoin was going to be huge and making claims that built unrealistic hype. This caused a serge in investing, but the bubble quickly popped.

How Can You Protect Yourself?

The first thing you need to do is be rational and consider the product at hand. Does this sound like another get rich quick stock? Are “experts” making huge claims as the prices get higher and higher? Has everyone jumped on board like mindless drones? Is the asset supposedly something that is a cure for a current crisis? Don’t be fooled. Step back and think before investing your money. Consider how the asset has done in the past. If it’s a new asset, such as Microsoft was back in the day, take the time to research the asset to determine if you feel it has lasting power.

How to Make Smart Investments

Invest in assets that you’re passionate about. For example, if you’re a firm believer in the company that manufacturers your car, invest in them. Another tip is to learn as much as you can before making risky investments. Don’t mindlessly throw your money at something just because others do. Also, consider the future. How will the asset you’re investing in handle the changes that are coming? While no one can see the future, there are always warning signs that signal the end or downsizing of an industry. For example, would you have invested in a carriage making company after Ford created the assembly line?

The next time you hear someone proclaim that you simply have to buy stock in a company, take a minute to think. Investing is something that requires time and research, while trading can be done on a whim, not everyone is successful at it. If you want to see long-term gain, you need be smart with your investments.

About the Author: Nathan Ford loves reading about the stock market and current trends, but cautions against fraud. Read about the porter stansberry fraud if you’d like an example of investments gone wrong.

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