Gambling or speculation is putting money into something with a hope of short-term gain, and often involves a lot of money in one sector, and lacking diversification. Gambling or speculation may also lack thorough analysis, and is often accompanied by gut feelings and rose colored glasses.
Investment proper, or gambling, we only know one thing for sure – there is no free ride. The higher the return, the higher the risk.
The only free thing I have ever discovered when it comes to investments is diversification.
Gold has risen spectacularly from $1000 two years ago to as high as $1800 and as at 24 January 2013 is $1684. It reached giddy heights very quickly, and investing at the current price would seem to be more like gambling than investing. A little reminder about ever upward trends arrived in late September 2011 when gold fell by $200 over 3 days.
One should only invest 5% to 10% of available investment funds into a single asset class such as gold, and have any debt or mortgage paid off or at very low levels first. In addition it would be prudent to have the equivalent of 3 to 6 months income in emergency cash.
But the world economy is in tatters !
I can already hear a number of gold buffs protesting loudly – “the world economy is in tatters, gold is the only thing that will save us”. Millions of investors (who make up the global market) obviously do not think so and some returns in 2012 have been :
- NZ shares 30%
- Global shares hedged 18%
- Global listed property 19%
A Gold Strategy
Investors in gold, or any asset for that matter, should have an exit strategy in place a soon as they invest, or 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 was $1400 – 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.
Of course gold is currently very popular and sought-after, so it is expensive.
What about countercyclical investing?
That is buying assets that are down and out of favour, when they are cheap.
We are told that global shares are trading at historically low P/E ratios, many companies have huge cash reserves, and so perhaps we should be buying more shares and less gold.
Bonds too are perceived to be safe (not always unless you know what you are doing), and also so are sought after , hence currently expensive. n.b . there are some ways to own bonds and to protect yourself, and that is another article for another day.
Diversification is, as always, extremely important. Think about the value of being spread across bonds, property, shares, and gold, rather than gold alone.
Forecasting & Stock picking
We have yet to meet anyone who can consistently, year in year out, forecast the gold price, economic events, interest rates, exchange rates, or pick the right shares (stocks).
“The only value of forecasters is to make fortune-tellers look good.” - Legendary investor Warren Buffet.
Short time frame under 2 years – cash only
Otherwise diversify over cash, bonds, property, and shares
Medium term investors should probably have more bonds than shares, and longer term investors should probably be the opposite
If you choose to add Gold, it will probably work out better over the long term
Don’t overdo property, since most Kiwis already have the bulk of their assets in property already . Be prepared to be patient. Don’t be pulled to and fro (emotionally swayed) by the news headlines . 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.