What is an Asset Bubble?
An asset bubble is a situation, in which there is a dramatic rise in the price of the asset over a short period of time not supported by the fundamentals, and is solely based on the beliefs and misconceptions. As the price doesn’t align with the fundamentals of the asset, the rapid increase in the price of the asset is followed by a quick decrease in the value which is referred to as the bubble burst.
The economist Hyman Minsky, broke down the life of the bubble into 5 stages.
Let’s look into the stages in detail.
Following are few asset bubbles in global history,
In the present situation, some analyst has expressed their view on the Gold as an asset bubble. They think that the price of Gold has gotten disconnected from fundamentals.
What should you do to protect yourself from Asset Bubbles? During the bubbles often, the price will keep increasing for years. The problem is that it is tough to time the asset bubbles and their subsequent burst.
“Diversification of your portfolio is the key to protect you from the asset bubbles to an extent.” Diversification means a balanced mix of asset classes in your portfolio. If there is a bubble in one of the asset classes of your portfolio, it will drive up the percentage you have in that asset class. So you have to revisit your asset allocation occasionally to make sure that it is still balanced.
Prashanth Prabhu, Founder & Principal Investment Adviser – 29k Group
Ramya Gurram, Para Planner – 29k Investment Advisers Pvt. Ltd