It's hard enough to take the proverbial investment "bath," as you watch your asset price fall precipitously.
But the even harder truth is that investors can suffer extreme losses in the same investment -- over and over again.
The end of an investment mania is when a 90% loss can happen more than once to the same asset. It's when bargain hunters and "buy and hold" investors believe that the price decline is temporary. They cling to the optimism which fueled the mania.
A few who take the first "bath" realize that it's time to get out. But many "hang on" all the way down. Some will try to catch the bottom -- repeatedly. But to their dismay, the price keeps falling.
Think of Citigroup -- a blue chip if there ever was one. On December 18, 2006, the stock's price reached an all-time high of $57. By March 5, 2009, shares traded at an all-time low of 97 cents!
Countless investors took a bath when this bluest of blue chips fell below $1…and yes, it bounced back. It's trading close to what would have been $3.80 before a 1-for-10 shares reverse split. Many 90-plus percent losses were suffered all the way down, depending on entry points.
The chart below is from the July Elliott Wave Financial Forecast, and shows how extreme losses can unfold repeatedly:
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"...objects of a boom can fall 90% or more, and some can 'do so again and again and so on into infinity.' Mania Chronicles details several EWI forecasts with respect to our long-term prognosis for Fannie Mae, all of which were followed by share price declines of 85% to 99% (see pp. 669-673). We can now add another massive hit to this stock, as Fannie is down another 85% from August 2009, when EWFF classified it as a worthless 'zombie bank.' More important, the larger implication remains on the table...the overall bear market has the potential for many...declines such as we saw in 2007-2009."
While the market decline of 2007-2009 knocked the wind out of the "Great Asset Mania," it didn't deliver a knock-out punch.
Many assets have gotten up "off the mat." Despite a shaky economy and a ballooning debt, optimism has kept stocks at relatively high levels.
True, the market has held up longer than we first anticipated. However, we believe "buy and hold" can be a dangerous investment strategy.
Learn why by taking a risk-free read of our signature publication package called the Financial Forecast Service.
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