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Bubbles or How Do We Survive?

December 1, 2008 - Ben Feldman
A stock market bubble is like an aneurysm, a bubble in the artery. Once the bubble breaks, trouble occurs. This is the pain investors endure. It comes with the territory. So how do these bubbles occur and how do you invest to protect yourself? You have to understand what is the driving force behind these bubbles. It is not inherent in capitalism to have bubbles repeating themselves endlessly. It is caused by the Federal Reserve, the United States bank. The Fed, as it is affectionately referred to, prints the money. They print money out of thin air. To accomodate the political engine they print to get us to consume. Right now they are printing billions upon billions of the paper stuff. They have a song that they sing as they print the greenbacks, "We're in the money, We're in the money." Once they have their targets met, they back off and lo and behold they get a contraction or crash or meltdown, whatever you want to call it. Then your stocks and whatever you own decline. Just like now. So how do you protect yourself? If you have the cash, buy stocks. The PE ratios are low on good companies. Contractions and recessionary times like these prepare you for the next round of boom days. Inflation affects the market and prices will rise. So keep your eye on the S&P index for the PE values and the Money Supply of the Fed. Both are easy to find in the financial papers. But, what if you don't like individual stocks? Well, consider mutual funds. If that is too risky then consider fixed indexed annuities. They have guarantees of principal and participate in the market. But they are not equities and they will not perform like stocks. They will serve you well with bonuses, and guaranteed minimum rates. These guarantees are NOT on stock market returns. Nothing guarantees stock returns. Investing rests on your age, safety quotient, financial liquidity and interest.


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