Tuesday, April 8, 2014

Markets Will Always Crash

by sprout money


On the US stock market there is a lot of talk about bubbles; bubbles that have grown so much that they inevitably burst. According to Fool.com, however, there is a solid reason why markets will always crash, usually in a timely manner as well.

Generally, one should expect a correction of 10 percent at least once a year, as well as a correction of 20 percent every two years and a 30 percent correction once or twice every decade. In a lifetime you should expect a 50 percent crash at least once, as crashes are more the rule than the exception.

Those who do not wrap their heads around that fact will definitely feel the consequences in their portfolio, says Fool.com. It begs the question, of course, whether all of this is necessary? Can the markets not just increase by 8 percent every year without all the fuzz?

The Philosophy Of A Crash

Economist Hyman Minsky devoted his entire career to studying the phenomenon of markets continuously overstepping their boundaries to the upside and the downside.  One of his bolder claims is the idea that the concept of stability as we once knew it, is now gone.

The idea of Minsky is very simple: stability gives investors a feeling of security, which stimulates them to invest more and take more risks. These risks and positions become bigger and bigger, resulting in bubbles sooner rather than later.

On the other hand it is important to realize that there is no other way for markets to function. If a yearly increase of 8 percent is certain, investors will have to pay more for the investment as they are sure of their returns. At a certain point, these investments will get so expensive that return will be a lot less than 8 percent and, if you look at it like that, crashes seem like the most logical thing on the planet.

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