What's In This Article?
The current state of the global financial markets is putting many Baby Boomers’ savings and retirement plans in harm’s way, some financial experts have warned. This is primarily due to the existence of so-called bubbles in the stock and bond market, which could wipe out tens of billions of dollars of Boomers’ savings.
Read on to discover what a bubble is, why they pose a threat to Baby Boomers’ savings and how you can mitigate this risk.
What is a Bubble?
A bubble is a type of financial phenomenon which occurs when the value of an asset or total market capitalization of a certain industry or market becomes inflated and exceeds the real value of the underlying assets.
These investment bubbles may last for several years or even decades – and market participants and economic experts often disagree about whether or not a bubble is occurring.
How Can Investment Bubbles Harm Baby Boomers?
Baby Boomers are heavily invested in stocks and bonds, and with many economists and market analysts in agreement that the equities market, in particular, is currently experiencing a bubble, Baby Boomers could see their savings and retirement portfolios take a massive hit when this bubble eventually bursts, even if their portfolios are well diversified.
Boomers are particularly vulnerable to this bubble bursting now, as they need their savings and investments to make ends meet, while younger investors can simply wait for the financial markets to recover.
It should be stressed that not everyone agrees that the stock market is currently experiencing a bubble.
It’s equally important to note that even if the market as a whole is overvalued, some individual stocks which still represent good value for money and aren’t overvalued will be insulated from the bubble when it bursts, though they may suffer an initial fall in stock price as investors panic and withdraw their money.
Can I Profit From Investment Bubbles?
While a bubble is ongoing, it’s quite easy to profit from it, as asset prices should continue to rise. However, it’s easy to get greedy and end up losing all of your profit and taking a hit on your initial investment if you don’t cash in on your positions soon enough.
It’s also possible to benefit from a bubble crashing, either by taking a short position in assets which you think are especially over valued or by buying a “put” option. The latter is essentially a financial derivative which allows the holder to benefit from an asset’s price plummeting in value.
Put options can also be used to mitigate risk and make your portfolio more resilient, though you should only use them in conjunction with a financial advisor, as they are complicated financial instruments and can end up costing you money if asset prices keep on rising.
The general consensus is the stock and bond markets are currently in an investment bubble – and it will burst at some point. So, if you’re a Baby Boomer and are mainly invested in shares and bonds, you should seriously consider taking steps to mitigate the risk of this bubble bursting.
You can do this by reducing the size of your equity and bond portfolios and instead invest in other asset classes, or buy financial derivatives to limit your exposure.
A Quick Summary
- A bubble is a type of financial phenomenon related to an asset or market’s value becoming inflated before ultimately bursting.
- Many economists and financial analysts believe the US stock and bond markets are currently in a bubble.
- With many Boomers holding most of their wealth in stocks and bonds, their retirement savings will be decimated if this bubble bursts.
- There are ways to mitigate this risk, such as investing in other asset classes and buying put options.