Why the Rules of Boom and Bust Never Change

In investing, pay attention to the boom-bust pattern to avoid being too eager when prices and risk are peaking, and too timid when they have dropped.

In investing, if you pay attention to the boom-bust pattern, you can avoid repeating the age-old mistake of getting too eager when prices and risk are peaking, and too timid when prices and risk have dropped. Fotolia

When the stock market is peaking, it often seems as if some great change has taken place and old rules and assumptions no longer apply.

For example, when the Internet stock mania reached its peak early in the past decade, lots of investors got taken in by the erroneous notion that old indicators of value, such as earnings and dividends, no longer mattered. At market bottoms and market peaks, many investors seem to think we’ve entered a new age where the old rules don’t apply. But that’s just not true. The details may change, but boom and bust patterns stay the same.