Asset Bubbles

By Glenn J. Downing, CFP®

I’m sure you’ve heard the term before:  asset bubble.  Sounds ominous, because a bubble is generally something that’s going to pop.  On the other hand, I think of bubbles with champagne.  So there are two images, both conjuring up a party that has to end at some time. 

What does the term refer to in terms of market valuations?  It means simply that at some point assets will be trading at a price that’s too high, and that the price will come down – maybe gradually, or maybe by a pop.  Why is there so much in the financial literature today about asset bubbles?  Because there appears to be a big asset bubble in the making.

Before I go on, let me define two terms: 

  • A market correction is a situation in which prices of assets traded generally decrease. Markets move up and down all day, so movement is the normal.  But a decrease of, say, 10% is not a common occurrence over the...
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