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No one foresees when bubbles will pop. Even those
Posted on: February 21, 2020 at 23:08:20 CT
JeffB MU
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who see them and warn about them can be WAY off on the timing.
I remembered learning in finance classes about diversification. Mutual funds were the big thing. They were supposed to drastically reduce the risks of the stock market because you had such a diversity of stocks. One company could surprise to the downside, but that would be made up for by other companies surprising to the upside.
And if you had bonds and other fixed income instruments that moderated returns even better. When stocks went up, bonds tended to go down.
Another level of diversity was precious metals etc.
That all made a lot of sense, but when Black Monday hit EVERYTHING DROPPED. People found to their dismay that there was a lot of linkage. Guys getting hammered in stocks had to sell bonds, precious metals etc. to meet their margin requirements. So much for the presumed safety in diversity. Obviously it helps, but there is also a lot of linkage even around the world. Foreign investments can also have additional risks due to additional taxation, regulations, nationalization and currency risks.
Yet another factor are the algorithms used in computer trading. Many traders complain of a rigged system. Some of the big boys can manipulate the markets and have computers right next to the computers on the exchange and can game the system. Sometimes they have crashes caused by problems with those algorithms. There have been times when an alleged "fat finger" mistake caused prices to plummet causing stop losses to be broken and the crash cascades as those stop losses are hit and price really plummet. That has caused some big losses for people were suddenly pushed out of positions because of those stop losses and then the prices bounce right back to where they were, or the exchange reverses some "accidental" whale trades but some people get ripped off.
I think those algorithms can exacerbate true market crashes and add additional risk. They could possibly be the catalyst for popping a bubble in a bad situation.
I remembered learning in finance classes about diversification. Mutual funds were the big thing. They were supposed to drastically reduce the risks of the stock market because you had such a diversity of stocks. One company could surprise to the downside, but that would be made up for by other companies surprising to the upside.
And if you had bonds and other fixed income instruments that moderated returns even better. When stocks went up, bonds tended to go down.
Another level of diversity was precious metals etc.
That all made a lot of sense, but when Black Monday hit EVERYTHING DROPPED. People found to their dismay that there was a lot of linkage. Guys getting hammered in stocks had to sell bonds, precious metals etc. to meet their margin requirements. So much for the presumed safety in diversity. Obviously it helps, but there is also a lot of linkage even around the world. Foreign investments can also have additional risks due to additional taxation, regulations, nationalization and currency risks.
Yet another factor are the algorithms used in computer trading. Many traders complain of a rigged system. Some of the big boys can manipulate the markets and have computers right next to the computers on the exchange and can game the system. Sometimes they have crashes caused by problems with those algorithms. There have been times when an alleged "fat finger" mistake caused prices to plummet causing stop losses to be broken and the crash cascades as those stop losses are hit and price really plummet. That has caused some big losses for people were suddenly pushed out of positions because of those stop losses and then the prices bounce right back to where they were, or the exchange reverses some "accidental" whale trades but some people get ripped off.
I think those algorithms can exacerbate true market crashes and add additional risk. They could possibly be the catalyst for popping a bubble in a bad situation.
Please explain why this message is being reported.
MESSAGE THREAD
No one foresees when bubbles will pop. Even those - JeffB MU - 2/21 23:08:20