What Forms An Investment Bubble

Investing can seem like an easy way to make tons of money. However, this is not always the case. There is a world of difference between speculation and investing. Most amateur investors speculate. They jump on trends that seem like the fast track to fortune, only to end up losing out. Our experts can help you make the most of your investments and contributions. However, we also want to make sure you have the necessary tools to make wise investments as well. Below, we discuss investment bubbles and why you should not be quick to jump on the get-rich-quick schemes.

What Is An Investment Bubble Anyway?

An investment bubble is an economic cycle that occurs when the price of an asset rapid escalates without justification from supply and demand. Because the supply and demand inflation is unwarranted, experienced investors end up selling off their stock equally as quickly. That’s when it happens – the bubble bursts!

The Tulips of Holland: A Case Study to Consider

During the 16th century, a botanist in Holland brought tulip bulbs back from a visit to Constantinople with the plan to plant and study them for his own research purposes. Awed by these new flowers, his neighbors stole several of the bulbs. After planting and harvesting the flowers, an inadvertent frenzy started. Wealthy citizens paid extremely large sums for rare varieties. In fact, anything of value was traded for tulips, including homes and properties. Future exchanges popped up, adding fuel to the speculative prices and feeding into the economic frenzy. But, when a buyer failed to show up to pay for a large tulip purchase, a sudden realization occurred. The price increases had risen to the point that they had become unsustainable. And that is when the tulip bubble burst.

Cause and Effect: When the Bubble Pops

Bursting bubbles are difficult to identify but there are a few factors that experienced investors may catch just in time. They typically follow a pattern.

    1. Excessive market liquidity is typically a given.
    2. This creates accelerated gains that are not directly supported by any real demand. A surge in investments occurs due to easily obtained credit and large, disposable incomes.
    3. Because of the limited number of assets, wiser investors typically sell off their assets quickly.
    4. This renders the market illiquid and leads to the sudden bursting of the bubble.

A bursting bubble can negatively affect the economy. It can also decrease your overall net worth if you have invested heavily in it. While you may not be an expert, the professionals at Royal Legal Solutions have years of experience to help you avoid costly mistakes with investment bubbles.

The Tulips of Holland: National Panic

The bursting of the tulip bubble created massive panic that affected not just Holland but all of Europe. Tulip pries did not just drop, they plummeted. Where once farms were traded for tulips, the flowers became with a minute fraction of their previous worth. The panic was so bad, the Dutch government actually had to step in and take control. Authorities allowed contract holders out of their agreements when 10% of the contract’s value was paid. The rich and poor alike lost fortunes.

Navigating the Bubble

Our investment professionals have years of experience; they can help pinpoint potential bubbles and trends at affordable prices. Investing in a bubble is not necessarily going to ruin you. However, knowing when to invest and when to sell is an invaluable piece of knowledge when it comes to preserving your net worth.

Last Updated: 
March 3, 2018

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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