A gold profit taking strategy
Investors in gold, or any asset for that matter, should have a strategy in place a soon as they invest, oar preferably even before they invest.
A strategy adds a discipline – and a discipline dramatically increases your chances of making money
Work out a realistic price target – say you overall average buy price for gold was $1400 per oz – then you might start selling at say $1550
So sell 25% if and when it reaches $1550
Sell another 25% if and when it reaches say $1700 and so on
This system is often known as” averaging” and there are many variations you could use. Just don’t make the steps too high or you may never make any money.
Of course if gold never rises above your cost price, then you will be glad you never put too much into it in the first place.
What about countercyclical investing? That is buying assets that are not “trendy”, that are down and out of favour, when they are cheap. The obvious answer now might be shares – unloved and not trendy at the moment. They will be though if a recent US fund manager forecast of 20% by the end of 2012 is correct.
But don’t jump in boots and all – rather use “averaging” by working out how much you are going to invest, and then buy 50% now and 50% in 6 months time ( again there are many variations on this theme that you could use).
If you have a steady income with income exceeding outgoings, buy shares by putting in regular monthly amounts – another form of “averaging “. Nb. it will still pay to have bonds in most portfolios – they too can be bought into with monthly payments if that suits your situation.
Diversification is, as always, extremely important. You need to hold dozens of bonds and thousands of shares.
Forecasting & Stock picking
We have yet to meet anyone who can consistently, year in year out:
forecast the gold price.
forecast economic events.
forecast interest rates.
forecast exchange rates.
pick the right stocks.
“The only value of stock forecasters is to make fortune-tellers look good.” – Legendary investor Warren Buffet.
If no one can forecast or stock pick, how do you invest?
By investing in index funds, or better still, asset class funds.
“Only 4% of active funds beat the index by a scant margin of 0.6 percent p.a., while 96% of active funds fall short of the index by an average of 4.8% p.a.” – David Swenson, Chief Investment Officer, Yale University Endowment Fund.
We like asset class funds such as those offered by Dimensional Fund Advisers (DFA).
Diversify across bonds, property, shares on and offshore. Buy gold too if it appeals to you, but not more than 5% to 10% of your total assets.
Short time frame under 2 years – cash only
2 to 5 years – cash, bonds and a small allocation to shares
5 to 7 years – bonds and shares
Over 7 years – maybe less bonds and maybe more shares
Gold – probably long term will work better
What about property ? Most Kiwis already have the bulk of their assets in property already.
Diversify and diversify and diversify
As always be prepared to be patient
Don’t be pulled to and fro (emotionally swayed) by the media
And will the world survive ? Powerful political and economic forces are hard at work trying to fix the global economy and they will probably succeed. After all the world economy recovered from WW1, the 1929 depression, WW2. and many other crises.