The dotcom bubble got its name from the URL suffix “.com.” The American internet companies springing up in response to the dotcom tide were called “dotcom companies.”
Here’s why the dotcom bubble burst:
It was unstable. The burst was long-coming, but most investors couldn’t see it because they were carried away by the enthusiasm of the new “tech era.”
Who would pass up an opportunity to be part of something huge?
So, investors kept jumping onto the bandwagon, scaling the internet stock prices higher and higher, paying little attention to established market fundamentals.
Of course, looking back now, it’s easy to see that laws of valuation were pretty much ignored. It’s just that people didn’t see it that way then.
Can we learn from what happened to avoid history repeating itself?
Better question is, what can you learn from the tech bubble to help keep your personal finances secure?
We’ve got you covered.
Here are five lessons you can learn from the dotcom bubble that will help in your personal finance decisions:
1. Avoid Being Swept Up by the Masses
One of the biggest mistakes investors made during the tech boom was blinding following the masses. This is not a new thing — stock frenzy is real.
Back then, people were excited about the internet’s revolutionary potential. It was big and showing results.
What’s known today as the fear of missing out (FOMO) naturally kicked in, and people ignored the basic principles of investing.
The lesson to learn here is that price doesn’t always equal value. Lots of factors can drive up asset prices, but if underlying performance doesn’t reflect or justify the heightened prices, a downturn is almost inevitable.
Take your time to carry out proper market analysis if you’re looking to invest. Don’t rush into anything blindly out of the fear of missing out, even if everyone you know is doing just that.
2. Get Out While You Can
Excitement was the main reason why the stock market rallied during the dotcom bubble.
You see, the internet was going to change the world. That wasn’t fantasy. But what investors failed to consider was how long a new idea takes to establish a solid base.
Today, the internet is a part of every aspect of today’s world, but it took decades to get to this point. Along the way, hundreds of internet companies entered the market only to go bankrupt.
This is an important lesson:
If you’re seeing short-term profits but the numbers don’t point to long-term success, take your cut and get out while you can.
Should you shy away from making ambitious decisions or benefiting from obvious financial opportunities?
No. However, learn to recognize sheer momentum for what it is.
3. Spread Out Your Investments
The moment you start looking into ways to grow your finances, whether through buying stocks or investing in other assets, professionals will advise you to spread out your investment.
You’ll often hear people call this “diversifying your portfolio.” That basically means spreading out the risk so you don’t lose everything on one bad investment.
This is a lesson many people have learned the hard way.
Granted, going all-in may mean you get to sip margaritas on some exotic beach sooner. But that’s only if things pay out.
To stay safe, you’re probably better off sticking to small milestones and smaller risks.
4. Approach IPOs With Caution
Initial Public Offerings, or IPO stocks, can be a hit or a miss. Many new companies with terrible foundations and unrealistic expectations filled the market during the dotcom boom.
Nothing has really changed when it comes to IPOs. They usually generate a lot of buzz, and some of these stocks may rally when they first hit the market, but that doesn’t make them good investments.
Most IPOs struggle, and some eventually end up going bankrupt.
The longer a company has been around, the more likely it is to have a solid foundation and reasonable growth metrics. Plus, some established companies pay dividends, which reward you for holding your shares even when the company performs poorly.
So, tread with caution when it comes to newly public companies.
5. Prepare for the Worst
It’s not easy to predict a financial downturn.
Sure, there were red flags in the late ‘90s, but to most people, they only became clear later. People were faced with a new industry that they didn’t know much about, and it was a race to try and figure it out.
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Thing is, you can be cautious all you want, but considering market movements are unpredictable, you should always have a strategy to shield yourself in case the worst happens.
You can apply this lesson to most of your financial decisions.
Here are examples of financial preparations to make in case of a worst case scenario:
- Creating an emergency fund
- Diversifying investment portfolio
- Getting insured
- Moving to liquid accounts
Conclusion
Can past mistakes help us avoid financial blunders?
Not entirely but yes.
There’s a lot to learn from the dotcom bubble. It happened at a time when investors didn’t really know how to approach lucrative deals and so emotions ran high, driving the frenzy.
Today, you’d know what you’re getting yourself into before touching overvalued assets. This is a lesson learned.
Image Credit: personal finance lessons by unsplash.com
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