How to Spot a Market Bubble

A major part of being a successful investor is knowing how to spot a market bubble and avoid it. Sounds pretty easy.

Unfortunately, it is not nearly as easy as it sounds.

I know what you are thinking now. No kidding it’s not that easy that is why I invest for the long term in good funds that will help me to accomplish my goals.

That is a good first step. Being properly diversified will generally lead to more success in the long run. But you still may fall victim to market bubbles without realizing it.

That is because proper diversification will ultimately put a portion of your assets into areas that are subject to speculation.

Recently, many advisors and financial pundits have advised allocating a small portion of their clients’ portfolios to cryptocurrency.

This is because there was a fear of missing out. They justified it for a number of reasons but in all actuality, it was because they felt they could earn their clients more money by moving some money into this area.

I am not denouncing crypto as a bad investment, but I am saying advisors who started placing client money in it over the past two years did not do so because of long-term growth potential.

They did it because they felt they were missing out.

And it’s natural. The crypto market shot up to new highs and people started pushing tons of money into it. Further inflating its balance.

And the POP! went the crypto market.

With the downfall of FTX and bitcoin trading at one of its lowest points in years this is very evident now.

Taking all that into consideration, let’s turn our attention to some signs that a bubble is popping up.

Signs of a Bubble

Here are some common signs that a bubble is about to burst.

• You start getting random tips from random people.
• Investors are making money, but they don’t know how.
• Investors are getting rich quick.
• People who don’t work hard are being rewarded by luck.
• You feel like you are missing out.

Random Tips

This happens all the time. You might have a friend, family member, or some random acquaintance you met once on the bus start giving you financial advice.

They tell you about some awesome stock or can’t miss investment they just made and how they will make so much money.

They tell you that you need to get in on it too.

This person may be right. Or they may have made a ton of money on it already.

That doesn’t mean that you should blindly follow their advice.

Unless of course this person has a track record of success, and you know they do something like this for a living.

More often than not, that is not the case. And this person got lucky and is now hoping to help you get lucky too.

When you receive tips like this try to verify their validity. If you are on the receiving end of one of these “tips” ask yourself if the tip makes sense. If it does, then ask if this is the right person to be giving this tip.

If the answer to either of those questions is no, politely move on.

You Don’t Know How People are Making Money

You might see people getting rich.

Maybe they invested in real estate or maybe in stocks.

You see the exponential gains in their account, but you are left scratching your head.

You do not quite understand why it worked and whether it could work again.

Sometimes people have a quick stroke of luck. And that is the reason they made a quick buck.

If can’t quite put a finger on why something worked, it’s probably not going to work again.

Get Rich Quick Schemes

These have been around forever.

Pyramid schemes. Ponzi schemes. Meme stocks.

These are all examples of get rich quick schemes.

If someone or something promises you wealth quickly it is too good to be true.

Sure, some people will, but they are the exception not the rule.

During the GameStop craze plenty of people made a ton of money. But just as many people lost. If not more.

Real wealth is built over time, little by little. There will always be people who get lucky. Just know that their method is not sustainable or even likely.

Watch my Investing for Beginners video to find how to build wealth over time. This is a tried-and-true method.

Dumb Luck

We all know this type of person.

Skated by in school. Was not a hard worker. Did not have a great job. But one stroke of luck and now they have more money than they know what to do with.

Maybe they invested in crypto. Or rode the meme stock craze to riches.

However they got there, it was likely due to dumb luck and not skill.

If these individuals are giving you advice, run the other way!

FOMO

Sometimes you can spot a bubble if you feel like you are missing out on something.

You missed the meme stock craze. Or maybe you watched a video on how to trades options for cash.

Now you feel like you are missing out on something.

So, you start doing it yourself. Because you have FOMO.

You don’t know what you are doing. But its working for others.

Heck it even works for you for a bit….

Until it doesn’t.

If the sole reason you invest in something is because you feel like you are missing out by not, don’t invest in it.

Investments are to be made after sound analysis. Looking at the financials of a company and verifying that it is sustainable.

Only after that should you invest.

If you need help going through that process, please reach out to me.

Putting it Together

The number one rule of spotting a market bubble is simple.

If it sounds too good to be true, it probably is.

If it falls under any of the 5 categories of spotting a bubble above, it is really too good to be true.

Take a step back and ask yourself “is this a bubble?” before you invest.

What are other ways you spot a market bubble?