Economic cycles are a natural part of financial markets. Periods of rapid growth can sometimes lead to bubbles—situations where asset prices rise far beyond their real value. When these bubbles burst, they often trigger financial crises. For individual investors, this can feel overwhelming. While no one can predict the future with certainty, understanding the dynamics and preparing mentally can help you navigate these turbulent times.
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What Is a Financial Bubble?
A bubble occurs when the price of an asset—such as stocks, real estate, or cryptocurrencies—climbs rapidly due to speculation rather than fundamental value. Eventually, reality catches up, and prices fall sharply. This correction can lead to panic selling and widespread losses.
One of the first bubbles recorded in history was the famous ‘Tulipmania’ bubble which occurred in the Netherlands during the early 17th century. At its peak, the price of tulip bulbs soared to extraordinary levels, driven by speculation and a frenzy of demand among wealthy merchants and investors.
Some rare bulbs were reportedly worth more than a house. However, when confidence collapsed in 1637, prices plummeted almost overnight, leaving many with worthless bulbs and significant financial losses. While its actual economic impact was limited compared to modern crises, Tulipmania remains a classic example of how speculation and herd behavior can inflate asset prices far beyond their intrinsic value.
Another recent example was the ‘subprime’ or housing bubble crisis during 2008. It was a widespread economic downturn triggered by the unregulated selling of subprime mortgages, which led to unsustainable debt for households, resulting in mass foreclosures and housing abandonment across the United States and then expanded to the rest of the world.
Financial bubbles may lead to significant market valuation drops. During 2008, it was the equivalent of -75% of the world GDP (source wikipedia).
Why Do Crises Happen?
Financial crises often follow bubbles because:
- Excessive optimism drives prices up.
- High leverage (borrowing to invest) amplifies risk.
- External shocks—such as geopolitical events or sudden policy changes—can trigger a collapse.
Understanding these factors helps you recognize warning signs without trying to time the market.
How to Stay Calm and Focused?
When headlines scream “market crash,” emotions can take over. Here are some mindset strategies to keep perspective:
- Avoid panic reactions: Sudden decisions often lead to mistakes. Let the ‘dust settle’ to be able to see clearly.
- Think long-term: Markets have historically recovered over time. It could take a few months (like after Covid crisis in 2020) or several years. However, if your financial goals are for the long term, you will have time to recover.
See next figure showing the MSCI world index evolution during major crisis:
Source: wikipedia
- Diversification matters: Spreading investments across different asset classes reduces exposure to any single risk. Read our blog to learn more about diversification.
Are We Facing an AI Bubble Like 2008?
The rapid rise of artificial intelligence has sparked both excitement and concern. After massive investments and accelerated adoption by businesses, some analysts fear the formation of an “AI bubble,” similar to the dot-com boom of the early 2000s.
These concerns stem from several factors: soaring valuations of AI-focused companies, unrealistic expectations about the capabilities of current models, and a race for innovation that may overshadow technological or economic limitations. Understanding these fears is essential to separate genuine opportunities from systemic risks.
Here’s a clear comparison between the 2008 Financial Crisis and the potential AI Bubble:
2008 Financial Crisis vs. AI Bubble Risk
Key Similarity: Both involve speculative behavior and inflated expectations. Key Difference: The 2008 crisis was systemic and credit-driven, while an AI bubble would likely be concentrated in tech valuations and innovation hype.
Questions to Ask Yourself
Instead of chasing trends or reacting to fear, reflect on:
- What is my investment horizon? Short-term needs require different strategies than long-term goals. Short-term needs are normally invested in low risk assets such as savings accounts.
- Am I comfortable with volatility? Understanding your risk tolerance helps you avoid stress-driven decisions.
- Do I have an emergency fund? Liquidity is crucial during uncertain times.
- Am I buying too expensive? Before buying a stock check the P/E ratio. The price-to-earnings (P/E) ratio is the proportion of a company’s share price to its earnings per share (EPS).
A high P/E ratio could mean that a company’s stock is overvalued or that investors expect high growth rates.
P/E ratios are most valuable when comparing similar companies in the same industry or for a single company over time. For example, High-tech companies could have a 30 or more P/E ratio, whereas Oil companies (as they have low growth potential) have less than 10 ratio. Read more here.
Focus on Education, Not Prediction
No one can predict exactly when a bubble will burst or a crisis will hit. Rather than trying to guess, invest time in learning:
How markets work.
The role of economic indicators.
Behavioral biases that influence investor decisions.
Knowledge empowers you to make informed choices without chasing quick wins.
My French Money Tip
A good idea could be to define your own plan in advance. What should I do if markets drop more than x%? Maybe having some additional cash saved and ready to invest for this kind of event could help you buy your preffered stocks at discounted price.
Conclusion and final thoughts
Managing investments during uncertain times is less about reacting and more about preparing mentally and structurally. Stay informed, stay calm, and remember: financial markets are cyclical, but your long-term goals should remain steady.
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Please remember that we are not financial advisors. We are just sharing our best understanding based in our own experience. This blog is for educational purposes only. Do not make investment decisions solely based on what you read in this blog. What works for us, may not for you. Do your own research and look for professional service if required. Read our full disclaimer in the ‘about’ page.
