The investment bubbles in this article demonstrate that if something looks too good to be true, then it probably is. Bitcoin, for example, has seen tremendous highs and lows. That’s why we take a pragmatic approach, diversifying and creating portfolios designed to rise with the market but also to be resilient if the market falls.
1. Tulip mania
In 1634, the world’s first recognised investment bubble began when speculators in the Dutch Republic began frantically buying up tulip bulbs. The bulbs were a highly prized status symbol at the time and the most desirable varieties saw their value surge. At the height of the craze, each bulb cost more than the year’s salary of a skilled worker or a townhouse in Amsterdam. By 1637, things reached a head when even the cheapest bulbs reached absurd prices. Demand soon collapsed and values nosedived, leaving many investors out of pocket and presenting a sobering lesson for today’s investors who may be tempted to get caught up in the latest craze.
2. South Sea bubble
In 1720, the South Sea Company underwrote the UK government’s debt and was granted an exclusive charter to trade in the south seas. Shares immediately rose tenfold and the company issued more and more shares to meet the insatiable demand. It issued shares for many different ventures all offering riches, including the ludicrously described venture ‘for carrying on an undertaking of great advantage but no-one to know what it is’. When it all came tumbling down, the executives were arrested, members of the government saw their personal fortunes evaporate and the collapse was followed by suicides.
3. The roaring twenties
The raging US stock market of the late 1920s was hailed by many as evidence of a new era of economic fundamentals. The creation of the Federal Reserve, the extension of free trade and anti-inflation measures were just some of the reasons considered to be behind the rapid expansion. In reality, the real driving factor was the increasing use of debt by individuals and companies. The bubble burst on 24th October 1929, which became known as ‘Black Thursday’ and marked the beginning of the Wall Street Crash that ushered in The Great Depression.
4. Japan’s real estate bubble
A surge in the value of the yen triggered a Japanese recession in 1986 and Japan introduced a programme of monetary and fiscal stimulus. This worked so well that it led to unbridled speculation and Japanese stocks and urban land values tripled. At the peak of the real estate bubble in 1989, the value of the Imperial Palace grounds in Tokyo was greater than that of all the real estate in California. The bubble burst in 1991, leading to the years of price deflation and a stagnant economy known as the Lost Decade.
5. The dot com bubble
During the second half of the 1990s internet stocks began to rise rapidly. The NASDAQ rose from 743 points at the beginning of 1995 to a height of 5,048 in March 2000, more than doubling in the final six months. When the bubble finally burst in 2002, the NASDAQ saw 78% of its value wiped away and most shares in internet companies saw their values plummet. The value of the tech-heavy S&P 500 was nearly halved and the shockwaves were felt around the world.
6. The US housing bubble
Some experts believe that the dot com crash led to the 2008 financial crisis because investors switched their money from technology to real estate, believing it was safer. US house prices nearly doubled between 1996 and 2006 but two-thirds of the increase happened after 2002. Even as prices were increasing there were ominous signs, such as rampant mortgage fraud and houses being acquired by sub-prime borrowers. House prices began to slide in 2006 and the average US house had lost a third of its value by 2009. The ripple effect was felt in mortgage-backed securities and led to the biggest global contraction since the 1930s.
7. Railway mania
In the 1840s, the UK was in the midst of a speculative frenzy as new railways were built. Aided by the British government, which cut interest rates and passed Acts of Parliament setting up a multitude of railway companies, the bubble reached its peak in the early 1840s when rail stocks reached ridiculous prices. It burst in 1845 after a rise in interest rates. In the end only a third of the proposed railways were built and many investors lost out.
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