Nowadays no one is immune to big-time booms and subsequents busts in this economy, as nearly all of us have recently experienced the downside of this equation. What to do?

I’ve kept a yellowing section of the Wall Street Journal back from August on the corner of my desk just for such matters. Authored by WSJ’s Karen Blumenthal, the article succinctly spells out five patterns to look out for in the life cycle of economic bubbles:

1. Fertile Ground. The largest bubbles are prone to develop during economically fertile times (e.g. the 1920s; 1990s & early 00s) which see rapid increases in [technological] innovation;
2. Getting Aboard. The bigger the bubble, the more people hop on to ride the wave, pushing prices up. From Dutch tulip bulbs in the 1600s to women’s Birkin handbags a year or two ago;
3. Ignoring Warnings. When prices rise like the shape of a hockey stick, experts begin to assert that today the fundamentals are different, lending legitimacy to the high prices. Warnings by the occassional naysayer are ignored and waived off as the voice of the pessimist. Think of the U.S. mortgage market three to five years ago and its favorite sons, now current White House economists;
4. Greed Takes Over. Common sense is thrown to the wind and buying becomes a frothy mess. Note the case of Beanie Babies back in the 1980s and Vegas condos three years ago; and
5. The After-Party. Or those caught holding the bubble when it bursts, as they try to keep the party going. Those (including yours truly) who held WorldCom stock in the early 00s, or Starbucks who recently found out that they couldn’t maintain rapid growth by just opening more locations
while same stores sales slip.

Who benefits from such bubbles? Hardly anyone.  People have the tendency to extoll a “gambler’s fallacy” that though they were caught in the last go-around, in the long run they’re still ahead of the game, now know better and have learned when to get out the next time. They’ve learned the “in’s and out’s” of the game.

Yet, even if we sit it out as spectators to center ring, content to watch the clowns finish their act, some bubbles can be really big, and affect all of us when they burst. Welcome to today! For example, the average ten-year return of the average stock-based mutual fund returned about 0.0% for the period. Heck of a decade for even the Average Joe.  So much for sticking to a long term investment horizon.

What I’ve come to learn from all this is that one needs to diversify and spread risk – to normalize the attenuation of the speculative curve – to ‘juggle the bubbles’ for bubbles can’t always be avoided. For as the old Sicilian saying goes “even a mouse keeps three holes.”