First, rely on your trailing stops to capture profits if you’ve already got gold holdings. You are running trailing stops aren’t you?! We talk about these constantly in Money Morning and we use them rigorously to protect our hard-earned gains against just such institutional nonsense.
Trailing stops, in case you are not familiar with them, are risk management tools – stop-loss orders really – that are set at some percentage below your purchase price or the high set since you bought something.
For instance, let’s say you buy a stock at $10. You set a 25% trailing stop. It turns out the stock doesn’t meet expectations and drops by 50%…all the way to $5. At $7.50, though, your stop kicks in and you’re out. That’s 25%, so you take a loss that’s far less than the masses who have held on.
What about the reverse? If the stock soars 75% to $17.50 a share, then weakens back to $10. Assuming you’ve been ratcheting your trailing stop up, you’d be out at $13.12, which is 25% below the $17.50 peak. So emotion, as my colleague Bill Patalon noted in a recent Private Briefing column on this topic, “is removed from the equation and you get to keep 31.25% in profits.
Many people may not be happy about that – until they realize a few weeks later that the stock has cratered to $2 a share, meaning that if you held on, your 75% profit would have swung to an 80% loss. Ouch!
It doesn’t matter what investment you choose…gold, Apple (NASDAQ:AAPL)…anything — investment can be protected. No investor has to suffer the ravages of a bear market, at least not voluntarily anyway.
Sophisticated investors, by the way, can consider using put options to accomplish the same thing.
Second, change your tactics.
When the big boys get rattled – why doesn’t really matter – that’s often a great buying opportunity. My favorite way to capitalize on this is to change up tactics, shifting from a “buy it all at once” approach to a “buy it over time” discipline.
Dollar cost averaging works really well for this because it’s simple and easy to implement. Plus it injects discipline into what is otherwise an emotionally charged situation – buying into steep declines. Over time, the advantage really adds up because dollar cost averaging helps you buy more when prices are lower and less when they are higher.
Studies suggest that this simple tactic can boost returns by several percentage points over time. I particularly like the fact that it puts you on an even playing field with the big boys…they can’t “game” you if you’re not playing by their rules and aren’t putting yourself in a situation where they can take advantage of you.
Third, sharpen your pencil.
Many great companies get put on sale when the big boys panic and start “cross-selling.” If you’re sharp and have already got a “buy” list of the best and brightest that you’d like to own, you can pounce. It’s one of the few times you can take “them” to the cleaners.
My favorites right now are the “glocals” I talk about so frequently. These are companies with fortress-like balance sheets and consistent, strong dividend track records in industry segments like biotech, energy and defense technology, all three of which the world needs rather than just wants.
The upshot on gold?
Many investors are fearful that the end of gold’s run is near and I don’t blame them one bit. It’s hard not to think so under the circumstances that led to Monday’s pummeling.
Every analyst from here to Saigon seems determined to revise forecasts lower. Societe Generale of France has issued a report entitled, The End of the Gold Era and none other than Goldman Sachs has issued missives advising clients that gold’s done.
Fine…just remember that Wall Street has a long, sordid history of telling the public one thing and doing another.
If you’re bothered by the thought of purchasing gold in the face of still more declines, try not to be. And, ask yourself if you’d rather buy something that’s been put on sale or something that’s too expensive?
No matter what happens with all the fancy modeling, no matter how the Fed, the ECB or the BOJ position themselves, fiat currencies are doomed to fail. History is very clear on this.
Gold, on the other hand continues to represent real wealth, and for this reason investors should continue to buy it…not all at once and not in isolation, but as part of a carefully reasoned, imminently practical and well-proven investment strategy.
Speculators…you’re on your own.