This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Protect Your Investments Against a Bubble, Know What Makes a Bubble

Any industry, including biotech, will rotate in and out of favor relative to a broad benchmark like the S&P 500. This year biotech is ahead of SPY, in 2009 biotech lagged far behind the broad market. This is normal market behavior and the next time the stock market falls a lot there will be sectors and industries that fall more than the overall market and some that fall less. The ones that fall more, maybe biotech, won't necessarily have been bubbles.

Bubbles are psychological events. Internet companies were going change the world in the future and so investors adopted a willingness to value those companies on non-traditional metrics, most notably eyeballs and investors were willing to speculate on them for fear of missing out.

The housing bubble was similar. Loans were being granted on less stringent requirements and people became far more willing to speculate on house flipping and were able to learn how to flip house thanks to a deluge of TV programs on cable TV.

During the Internet bubble, investors came to expect compound annual growth rates of 20% to 30% and in defending the housing market six years ago many serious analysts pointed out that there had never been a national decline in housing prices. Both sentiments were transformational shifts in psychology and both had severe consequences.

True bubbles are always obvious in hindsight but are difficult to detect during their build up. Instead of trying to find the next bubble investors would be better served to manage the risk they take in their portfolios by never allocating more than 20% to any one sector, more than 10% to any one foreign country or more than 5% to any single stock.

Additionally, remaining disciplined to your investment strategy during times of market turmoil is crucial. When the stock market goes down a lot it eventually comes back. After the tech wreck it took seven years and after the financial crisis it took five years but it came back. The people most damaged were the ones who sold after the large declines. There is no strategy planned out ahead of time that calls for selling after large declines. The people who remained disciplined, who did not panic were not permanently damaged by either bubble.

2 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,943.81 +28.74 0.17%
S&P 500 1,967.57 +2.89 0.15%
NASDAQ 4,415.49 +19.2860 0.44%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs