I am always in awe of the vast specificity of the English language, so imagine my delight to find out that there is a word for the fear of bubbles: trypophobia. While the word most commonly refers to the fear of actual bubbles, such as soap, gum, or boba, I will take the liberty to use it in the context of financial risk.
The concept of diversification, which is kind of the opposite of bubbles, is foundational to finance. It is common sense to spread your investment around, so if something fails, hopefully something else succeeds. That is why a lot of our 401Ks are put into a combination of stocks and bonds and not all on red seven on the roulette.
Non-diversification—concentration—has a way of getting us in trouble. When we put all our eggs in one basket, and the basket then breaks, we end up with yolk on our faces. Some cases in point are the Tulip Mania of the 1630s, the Wall Street Crash (1929), the dot-com bubble (late 1990s), and the Global Financial Crisis (2008).
The crash of Silicon Valley Bank in 2023 still holds many risk lessons, one of them about concentration. Many tech start-ups kept their cash funds at SVB, so when the run on the bank began on March 10, the deposits fled in way bigger chunks than would be the case for a more traditional savings and loans institution.
Lately, trypophobia has been flaring up because of the rapid rise of tech valuation in general and AI in particular. And while it is completely justifiable to want a bite of the AI apple—egg?—there are some cracks showing.
This week, the NY Times brought a column about the increasing risk of stock indices that spoke directly to us Nervous Nellies who thought we were safe by investing in broad funds. There is an SEC rule from 2019 that says that if more than 25 percent of your index fund is comprised of stocks that each have a weight of 5 percent or more due to market concentration, you have to let your investors know. And those messages are starting to trickle into inboxes. The big eggs in the basket are getting bigger because they are tech and AI eggs.
This situation of widespread concentration (contradiction intended!) will eventually correct itself through valuations proving themselves right, the bubble bursting, or any combination thereof. Until then, the best way to calm the trypophobia is to be aware of the risk (always) and diversify, diversify, diversify!
FRG and The Risk Report find market risk interesting because it affects the financial institutions we work with.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/.