Market crashes are an interesting area to study. Many economists and
finance professors devote countless hours trying to discover the precise
causes of crashes.
In 2008, it was the housing crisis. In 2000,
it was Internet stocks. In 1987, it was portfolio insurance. In 1929, it
was highly leveraged stock speculation, or maybe it was a
contractionary monetary policy. Really all that can be known for certain
when it comes to market crashes is that hindsight is 20/20.
And in each case, while there were warning signs of these problems, the size of the losses caught most investors by surprise.
In
the most recent crash, for example, the problems in housing existed
long before the markets went into a tailspin. And the underlying problem
existed for an extended period of time before every other crash as
well. Yet, moving to cash at the first hint of a problem can be costly
to investors because it means they will miss out on bull market gains. (more)
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