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Bubble Trouble

Kevin Raymond August 29, 2011 Freedom by Friday No Comments on Bubble Trouble

So, you thought gold was going to go to the moon last week? It broke $1,900 per ounce and it looked as if there was no end in sight. As a gold bull (look at my record if you have any doubt) I think gold is going much higher…just not yet. It took ten days for gold to move from $1,800 to $1,900 per ounce, yet only 24 hours to give it back.


A Dollar and a Dream

“A dollar and a dream”…  This was the famous ad slogan for the NY lottery several years back.

The lottery is a brilliant business.  Your chances of winning are virtually zero.  But hey… It’s only a buck!

Well what if you could get hundreds, thousands, or even a million people to give you one lousy dollar just like the lottery?  That’s what’s happening here!

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The problem with bubbles is that they occur too quickly these days. In the past it would take months or years to see a parabolic rise in an asset class. The reason was a lack of speed of dispersion of news. We’ve come a long way from the days of the Rothschild’s using carrier pigeons to get market-moving information ahead of the crowd.

Today information moves at lightning speed. The Internet allows for movement of information at light speed, but also it allows for individuals to trade on that information quickly. We see it not only in the gold market but in the stock market as well. The past few weeks are testament to the volatility that can occur in a very short period of time. It’s something you need to get used to.

The volatility plays into the hands of traders, and investors as well. For traders, it’s the chance to scalp quick profits trading index funds, inverse funds and stocks. For long-term investors, here is the chance to position your portfolio for yield. Companies like Verizon (VZ-NYSE), Altria (MO-NYSE) and a host of others are paying yields that dwarf treasuries and bank checking accounts.

As an investor, you can take some solace that high dividend paying stocks don’t decline in price as quickly in a downturn, and if they do, they bounce back quickly. There is a reason to buy them if their dividends are secure, and that reason is that you are going to be paid to wait for a recovery.

We will all try to retire one day, that is a fact. Some of us sooner than others. The difference will be how we manage our money. While at times like these it may seem wise to have cash under the mattress, it’s critical that you don’t lose sight of another fact. Since the early 1900s investors in the stock market have made annual gains of more than 9% per year on average when dividends are reinvested. Better still; if you had invested the day before every market crash, you would still dwarf the returns from bonds and cash. Much of it is about stock selection and diversification. If you bought all the dot com stocks the day before they crashed, then I doubt you would ever recover your losses.

Today, the market is presenting you with opportunities, but that does not mean you should be jumping in with both feet. Markets do not bottom overnight. It’s a process. And, that is why investing in the market should be a process as well. The best strategy to use today is to invest selectively and slowly. Instead of buying 1,000 shares today, buy 200 and do the same every month for the next five months. This is called dollar cost averaging and assures that you are not going to be caught buying at the wrong time. Unfortunately, even a simple strategy like dollar cost averaging is overlooked by most investors who tend to panic when buying and when selling. The thinking is that if “I am willing to buy or sell today, why not buy and sell it all?”. Sounds logical, but it’s flawed thinking, as the market is anything but logical. If you haven’t figured that out yet, then maybe you are better off buying a more comfortable mattress.


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