A few days ago I received an email from a colleague asking me where he could by gold “lots of it”. This took me back a few years to December 1999. I was working for a stockbroking firm and a friend of mine — who had never owned a share in her life — called me wanting to buy her shares in Iexchange. She had her children’s school fees saved and she was hoping to double her money by January. Three months later the tech bubble burst and the stock market plummeted.
An asset bubble is actually quite easy to spot; it is when people start piling into an asset they have never invested in before simply because they believe it is an opportunity to make a quick buck. The reality is that by the time the average investor has spotted an opportunity, the opportunity is long gone and they simply fall victim to the early adopters who are looking to offload before the crash comes.
A sensible investment decision is based on fundamentals, not on a get-rich-quick gamble. In the case of gold, it a safe haven when all goes pear-shaped.
If you were concerned that your investments were at risk and you wanted somewhere safe to put your cash, then gold would have been a good an option.
However if you buy gold because it has rocketed over the last six months and you invest purely on the premise that it will follow the same trajectory, then you have in fact significantly increased the risk of your investment rather than reducing it.
A good rule to remember when investing is that your returns will be a function of what you paid for the asset. The more you pay for it, the lower the future return — the less you pay for it, the higher the chance you will make your money.
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