Irrational exuberance is a state of mania when stocks increase regardless of deteriorating fundamentals or uncertainty. When this happens, greed, overconfidence, and fear of missing out takes over the mind of investors. In this ColoradoBiz Magazine article, Kevin McNab explores how investors can guard against an inevitable drop in the markets when irrational exuberance takes over.
Over the summer, my 15-year old son became interested in stocks. He has a small portfolio of stocks to watch in an account I set up for him as a minor. As an inquisitive teenager, he asks questions about the markets and investing – a lot of questions. And as a wealth management advisor, I was eager to encourage his new interest.
On the night of Jan. 3, the United States killed Iranian general and terrorist Qasem Soleimani on Iraqi soil. After rising tension with Iran leading up to the death of Soleimani, experts could only guess to what extent Iran would retaliate. The overwhelming consensus was they would retaliate, which created uncertainty across the world and with the markets. Despite this uncertainty, the stock market increased the next day. When I came home from work that day, my son asked why the market had gone up given the events of the previous night. I explained, “The market doesn’t always make sense, but it will come back to equilibrium over time.” He accepted the answer and did not have any more questions.
On the night of Jan. 8, Iran retaliated sending dozens of missiles into an Iraqi base, home to American soldiers. This led to greater uncertainty and instability, with questions posed about the possibility of a war with Iran. The next day, the stock market climbed to a record high. Once again, my son was waiting for me when I arrived home. He asked, “Why did the market go up after Iran attacked us?” My answer, “We are at the point of irrational exuberance.”…READ MORE!