Financial Autonomy

Episode 63 – Why do investment markets have bubbles? If you’ve ever seen a graph of any share market, you will know that whilst over the long term it tends to go up, the graph isn’t a straight line. Markets will go up, up, up over several years, only to fall back for a year or two, before re-starting their upward climb. Research on United States investors shows that whilst over 20 years to the end of 2017, the S&P500 share market index returned 7.2%, the average investor experienced a return of 5.29% per year. I don’t imagine Australian investors would be much different. This under-performance of investors has been observed for many years, so what’s going on? And how does it relate to market bubbles? Market bubbles, and their subsequent busts, reflect over-reaction. We bid up prices beyond that which makes sense, and then on the downward slope, we sell when we don’t need to, and prices go below what logic would dictate they should be. These extremes have nothing to do with balance sheets and profit and lo