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One sector is the loneliest number when it comes to investing

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Will all the gold that glitters glitter less?

Will all the gold that glitters glitter less?

My last post, One stock is the loneliest number when it comes to investing, made the case for why you shouldn’t own one stock as an investor. Diversification is an important part of your investment planning.

Similarly, today’s activity in the gold market, and really, the last few years, has demonstrated why single sectors present significant dangers to investors who overweight them.

Gold is having a massive down day. It’s dropped nearly 10 per cent as of this writing — in one day — the most since the early 1980s.

The writing was on the wall a long time ago. In Gold riot, I discussed why gold had much risk built into it for investors, especially when few were talking about this risk.

Here’s a quote from Warren Buffett as posted on my blog from a few years ago:

Buffet on gold:

“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Ah, the Ziggy Stardust gold analysis …

In Fortune, Buffett recently said:

“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States,” Buffett said. “Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”

A very, very interesting illustration …

Anyone who paid attention to the wisdom above, to the valuations that Buffett drew attention to, would have known that there was huge risk in gold.

Forget all the reasons you’ve heard over the last few years for why gold was a great buy. History has proven that reasoning wrong.

GLD

The movement of gold as reflected by the SPDR GOLD TRUST (GLD)

As in many things, now that the stratospheric valuation in gold has been beaten down badly, gold is cheaper (down almost 18 per cent year-over-year). What the future holds is unknown. But what hasn’t changed is the following:

  • Single sectors expose you to great risk if you haven’t built a well-diversified portfolio
  • “Hot money” moves fast and takes few prisoners when it leaves a sector

Gold may be much cheaper now than it was a few years ago, but gold is only a compelling buy if the future shows it to have been cheap. Meanwhile, are there other companies out there that are actively engaged in producing goods or services that will have a better chance of creating value in the future?

By way of comparison, from gold’s peak a few years ago, the returns on dividend-payers in the U.S., Canada and globally look spectacular. The “fear trade” (buying gold) has been a poor investment.

Markets will correct. It’s inevitable. You can do your part protecting yourself by making sure you have a diversified portfolio.

Do you?

Click here for more about bonds/fixed income investments.

Click below for more about asset allocation and reallocation strategies:

Get the balance right

A simple way to arrive at the right asset allocation for your portfolio

Plan like a pension fund manager when it comes to your investment portfolio

Let’s think about assets

Asset allocation: Diversification is king

Click here for articles about dividends/dividend-payers.

Click here for a collection of articles about investing.

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Written by johnrondina

April 15, 2013 at 2:35 pm

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