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I’ve been an active investor for nearly 15 years now. That’s not a long time in the grand scheme of things, but I’ve seen and experienced a lot in that relatively short span. When I was first starting out, I benefited from the soaring gains during the beginning of the dot-com era. Then, pop! The market recovered quickly from that and things seemed to progressing nicely. Then, POP! The worst economic environment in nearly 100 years.
These bubbles have ballooned and popped innumerable times throughout history and they’ll continue to do so. It’s up to you to recognize when they’re happening and limit the impact on your finances.
Understand Your Investments
Before you can hope to avoid losing big when the bubble bursts, you must be aware of where you have invested your money. You don’t need to be an expert on every company in your mutual funds, but you have to be aware of the fund strategy. At the very least, you’ll want to understand the risks and rewards associated with your holdings and ensure they align to your goals.
Diversify Your Portfolio
To smooth out any wild market swings, build a diverse portfolio with investments covering different asset class and regions. This will limit your exposure to any one area. Then, if you truly believe the latest craze is certain to take off and you just can’t miss the opportunity, proceed rationally. If you must invest, ensure you devote no more than a very small portion of your overall portfolio, an amount you won’t lose sleep over.
Don’t Be a Lemming
The one thing I remember leading up to the dot-com and real estate bubbles was that everybody was involved. People everywhere were talking about the next internet IPO they were getting into and there were TV shows catering to flipping houses. The next time you see such a scenario, run the other way!
We’re surrounded by a plethora of potential bubble bursting scenarios, including gold and supposedly safe treasuries, among others, and there’s no surefire way to identify which will actually burst and which will slowly deflate. Furthermore, you won’t always be able to avoid suffering when bubbles burst. Virtually the entire world was affected by the most recent episode. However, with some due diligence, you can limit the consequences to some degree.
