11. ‘Fallen Angels’
A “fallen angel” is a stock or bond that has fallen from its lofty perch back down to Earth. In the bond world, it usually means a company that has had a formerly high credit rating reduced to junk status. For stocks, it can refer to any high-flying stock that is now in the dumps. These investments are often tempting for investors because it’s human nature to remember former highs and think the current lows will eventually pass.
Why ‘Fallen Angels’ Are Toxic
Stocks that are falling sharply are also known as “falling knives” because, just like with a knife falling through the air, the odds that you catch it without getting hurt are minuscule. Many stocks that drop by 50%, for example, continue straight down until they have lost 70%, 80% or even 100% of their value. Since it’s nearly impossible to catch a stock at its absolute low, it’s a much safer course of action to wait to invest until a stock is back in a confirmed uptrend. Only then does a stock have the potential to transform from a toxic investment to one with long-term growth potential.
