Build Wealth, Is Your Stock Portfolio Adequately Prepared for 2007
Articles Posted by: Janet Schlarbaum
Author: J.S. Kim
This past month, I saw a professional newsletter that stated that there was almost nothing good to buy right now. That most major markets including leading emerging markets in China and India were overbought and that a buying opportunity would not present itself until there were major corrections. Though I mostly agree with that statement as it pertains to traditional stocks, this comment reflects how narrowly focused the overwhelming majority of self-proclaimed investment “gurus” out there tend to be.
One asset class that corrected steeply at the end of 2006 and beginning of 2007 was gold stocks. If you have been keeping track of gold and gold stocks, then undoubtedly you used the dip at the beginning of the year to add to existing positions and even possibly to establish new positions. Even if you didn’t, with the past couple of weeks being stellar for gold stocks, it is not too late. Of course, as has always been the case, rapid ascents will be followed by steep drops that will shake out a lot of gold investors that do not fully understand this asset class. However, I contend that by no means is it too late to buy into gold stocks.
Why?
It is always better to buy into this asset class a little a late during dips and consolidation phases and sell out of this asset class a little late during bull runs versus buying and selling too early. Why?
During consolidation phases and corrections, declines in gold stocks can be steep and rapid. Often there are days of temporary rises when it seems that the correction has bottomed, only to be followed by another steep decline much to the dismay of many investors. It is better to wait for some sustained momentum, and perhaps give up 5% of the next upleg rather than get in too early, lose 30%, sell out prematurely and miss huge gains that follow.
As far as selling, how many stories have you heard about people that owned Microsoft and sold out at a 50% profit only to miss the next several thousand percent they could have had had they held on? Again because gold is such a volatile asset, and you may be tempted to sell out during a great upleg after 150% profits, it is better to widen your stop loss strategy at this point to account for the volatility of this asset class.
If your stock dips 25% from this point, and then goes another monster run of 400%, you don’t want to be kicking yourself. Widening your stop loss point where you would be stopped out at a 90% gain is still a huge gain, and probably sufficient to keep you in the game during even a steep correction in a continuing upleg. As you gain experience, you will develop a better feel for exactly how much you may need to widen your stop losses to prevent getting sold out too early, but always remember that is much better to sell out a little late and give up some of your profits rather than sell out too early and give up enormous profits that you would have earned by holding on.
A word of caution. You must know what you are doing when you buy into gold stocks. During major gold bull runs there literally have been differences of several hundred percent in the returns of even major gold stocks. You will almost never see differences of this kind among similarly structured companies in any other major asset class. For example, seeing a 20% return in Exxon stock but a 370% return in British Petroleum just isn’t very likely to happen. As long as you learn how to buy gold stocks before you do it, that’s the most important step.