Question

As an investor, what evidence would you look for to detect an economic bubble forming? What steps might you take to lower your risk of losing substantial investment to an economic bubble bursting?

Answer 1

The first evidence of the formation of economic bubble forming is high price earning ratio of the investments. If price earning ratio is very high and investment is overpriced, it means that economic bubble is forming. The second evidence is high rate of inflation, coupled with the increased number of trade volume in the asset market. It signals the formation of the economic bubble. The third evidence is the more number of speculative investments and banks opting to give loans with poor credit ratings. It shows that poor creditors are being created and economic bubble is taking place.

To lower the risk, the first step will be to diversify the investments so that loss can be minimized and risk is optimized. The second step will be to dispose the investments at higher price and put the money into the government bonds so that value is protected. The third step will be to convert domestic currencies into international currencies such as Euro and Pound so that the value of money is protected when the economic bubble burst. The investment is bonds denominated in foreign currencies (Euro & Pounds) in foreign market, can also be done to save the funds and get some return.