Investing with Emotion Losing Bet, Experts Say

Gold fever is nothing new among investors, but gold’s wild post-recession swings are attracting more attention, particularly from people who have yet to gain a position in the …

Gold fever is nothing new among investors, but gold’s wild post-recession swings are attracting more attention, particularly from people who have yet to gain a position in the gold market. The question for gold, as it is with any other investment, is whether now is a good time to buy, and experts remind these investors that making this decision without emotion is what it is most important. If an investor buys because he or she feels like she is missing the boat, that person is investing for the wrong reasons. The market is and will always be unpredictable and the safest bet is one made based on research and knowledgeable advice. For more on this continue reading the following article from The Street.

Gold has been on a wild ride the last couple of weeks. It went up $100 in a few days and then went down $100 in about 24 hours.

Early in the day on Tuesday we sold one-third of our clients’ position in the SPDR Gold Trust(GLD) based on sentiment indicators like the number of analysts that were calling for $3,000 as the actual price was approaching $2,000 and the fact that GLD surpassed the SPDR S&P 500 ETF(SPY) as the largest ETF.

On a more fundamental level, a partial sale was warranted as our position grew well beyond our target after this most recent move to $1,900. Since then the price has obviously gone down quickly but the fear of US dollar debasement still exists which underpins the fundamental case for gold even if the next $150 is down not up.

The volatility in the last couple of weeks has created a lot of uncertainty on the part of investors which leads to indecision which makes for poor portfolio management. If you don’t own gold now, should you buy it? Would it be better to wait? This dilemma repeats over and over in all sorts of investments and asset classes but rarely is a concrete suggestion made.

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How to buy into a position, or an entire portfolio that matter, is a question that comes up from readers and clients alike. The future is of course not knowable which can be the foundation for building an entry strategy.

Gold is an important asset class because it often has a low correlation to equities and tends to go up in the face of certain external shocks. Regardless of the price today, I would expect that gold would go up tomorrow if there were some sort of meaningful terror attack, for example.

The key is to eliminate emotion from the process or at least reduce it as much as possible. One way to do this is to plan out partial purchases on a set timetable. For example, an investor, as opposed to a trader, could buy one-third of his or her intended position today, another third in two months and the final portion two months later.

Additionally a limit order for the second purchase could be placed at some low price to trigger ahead of schedule in order to take advantage of a fast decline. With GLD currently around $172, perhaps the limit order could be placed at $155.

Succumbing to emotion is off the table with this type of strategy, the investor only needs to be disciplined, which although not easy is easier when not clouded by emotion. There are many ETFs providing exposure to gold one way or another with the aforementioned GLD the being the most heavily traded.

The iShares Gold Trust(IAU) would also be suitable and has a lower expense ratio than GLD. Another choice is the ETF Securities Gold Trust(SGOL) which, uniquely, stores its gold in Switzerland.

Our partial sale of GLD was based on a couple of sentiment indicators that have generally been reliable, calls for $3,000 gold is similar to calls for Nasdaq 6000 and GLD becoming the largest ETF is similar to Cisco(CSCO) having been the largest company in the world for a short time in 2000, but the asset class is important in the context of a diversified equity portfolio.

This article was republished with permission from The Street.

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