In this investing climate investors are often faced with very tough decisions with where to put their hard earned money. Most long term investors choose to diversify their holdings among many different asset classes to reduce their overall risk. However, there may come a time when depending on certain circumstances in the global markets that you may find yourself owning a parabolic investment.
Generally speaking the world parabolic refers to the concept of an investment continuing to increase in value over the course of several weeks, months, or even years. Wide spread speculation is usually to blame, but it can come from any number of factors. Eventually, it will get to a point where it has reached a peak and will revert back to the mean of more normal prices. This process can be painful if investors are caught on the wrong end of the curve. Many pundits on television often refer to commodities having the potential to experience these types of moves because of uncertainty in global markets and supply/demand issues.
A good example of a parabolic investment takes us back all the way to the mid 1630’s and the Dutch Golden Age. It was at this point in time that the tulip bulb was becoming quite the status symbol. Farmers and growers were willing to pay more than 10 times the annual income of a traditional laborer. They even developed a type of futures market where you could purchase contracts to buy bulbs at a later date. Needless to say, it wasn’t long after that the prices started tumbling to the ground and the great Tulip Mania would come to an end.
Please remember this is for informational purposes only and to always consult with your financial adviser regarding your specific situation. Past performance does not guarantee future results.
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