Today we talk of inflation, financial bubbles and unsustainable run ups of stock prices. Yet, where was talk of this terminology a quarter century ago? Robert J. Samuelson an opinion writer for the Washington Post, said in a recent opinion piece that 25 years ago, the word bubble was never applied to equities.
Yet, it’s useful for investors to understand what inflates the succession of bubbles we see today. After all, few would deny that we seem to be mired in an ethos that dictates emotional responses to financial markets as the rule of the day.
Why is that? It can be summed up in this maxim: Dreams die hard. We have an innate desire to see life on the sunny side, although we would strongly deny it, if we were pressed on the matter.
Belief is likely one of the strongest forces on earth. And the way we form beliefs is far from scientific. We come to investment strategy often with various beliefs that fuel emotional responses, not logical ones. Our facts are fuzzy; our penchant for emotionalism easily turned to exuberance or fear.
When it comes to managing equities, clarity is the key to prosperity. Understand what is driving the markets. Wait for that opportune moment when the mood on the streets gives you a clear signal of where stocks are going. And tap the expertise of your retirement planner.