All That Glitters is Gold
Bet Your Bottom Dollar
I am a lot like many investors--as I get older, I become more conservative. When investing, I like to buy and hold, rather than try to read charts, jump in and out of momentum stocks or time the market.
I envy my fellow editors at Cabot, because they enthusiastically follow the stock market to catch the next move up or avoid the next move down. They have become masters at using momentum indicators, created by Carlton Lutts (the founder of Cabot), to predict when to buy and when to sell. And the good part is that they pass along their findings to you.
On the other hand, I enjoy buying high quality, blue chip companies at reasonable prices and holding for several years. There are a couple of reasons, though, that will prompt me to make an early exit: If a company's stock becomes ridiculously overpriced, or if management's plans for future growth produce poor results.
Part of me wants to do a little gambling, though. If I can find a stock selling at a really big discount because of minor problems, I'll take a chance that management can fix any problems quickly. I don't go off the deep end, though. I reduce my risk by diversifying; I invest in bonds, gold, or other assets that will counteract any "gambling" losses.
Reducing risk takes on many forms. You can invest in a plethora of stocks in different industries. You can keep part of your money in cash or CDs. Or, you can invest in other asset classes such as commodities, currencies, bonds or real estate.
I prefer to invest in other asset classes by investing in exchange-traded funds or ETFs, which have become a great tool to help reduce risk. There are ETFs that invest in anything and everything: large companies, small companies, companies in far-away places, and companies in one of many business sectors or indexes. In fact, when I queried Fidelity Investments, it listed 961 ETFs!
I prefer to invest primarily in common stocks, but I also buy ETFs to diversify and reduce risk. There are many opportunities to invest in asset classes that perform well when the stock market is declining. Unfortunately classifications such as commodities, currencies, bonds or inverse (short) ETFs sometimes decline when the stock market is advancing.
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One of my favorite areas to invest in to protect my profits and reduce my portfolio risk is an ETF that invests in gold. SPDR Gold Shares ETF (GLD) has advanced 150% during the past five years compared to an advance of just 1% for the Standard & Poor's 500 Index. And during the ugly bear market from October 9, 2007, until March 9, 2009, GLD was up 23.9% compared to the -56.8% drubbing that the S&P 500 took.
The SPDR Gold Shares ETF seeks to replicate the performance of the price of gold bullion on a one-to-ten ratio. The management fee of 0.40% is low. The ETF pays no dividend.
Gold Shares provide investors with a convenient way to invest in gold. The shares trade on the NYSE and may be bought and sold like any other securities. I believe further political disruptions around the world will push gold prices higher in 2010 and 2011. Also, inflation will likely begin to rise within the next 12 months, which will also push gold prices higher. If the economy falters once again, investors will sell common stocks and invest in gold.
Gold bullion increased from a low of 800 to almost 1,200 per ounce during 2009, but has now declined to 1,107 per ounce. The resulting lower price of GLD shares presents an outstanding investment opportunity. The purchase of GLD will counteract the volatility of common stocks and will guard against a possible fall in bond prices.
Another of my favorite areas to invest in to protect my profits and reduce my portfolio risk is an ETF that invests in the U.S. dollar. PowerShares DB U.S. Dollar ETF (UUP) is a good hedge against declining stock prices. UUP rose 10.1% during the recent bear market while the S&P plummeted 56.8%. UUP shares are less volatile than the stock market or gold, which is another plus.
PowerShares Deutsch Bank U.S. Dollar ETF seeks to track the price and yield performance of the Deutsche Bank Long U.S. Dollar Futures Index. This index is comprised solely of long futures contracts. The futures contract is designed to replicate the performance of the U.S. dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. Total ETF expenses are 0.83% of total value, which is reasonable. UUP pays no dividend.
We follow the actions of hedge funds, because they invest trillions of dollars and can cause major fluctuations in the stock market and other financial markets. Hedge funds and other institutional investors have been selling dollars and buying stocks and commodities during the past several quarters. Sometime in the not too distant future, investors will begin to reverse these trades by buying U.S. dollars and selling stocks and commodities. Massive U.S. dollar buying will push the price of the U.S. dollar substantially higher, and UUP shares will rise, too.
UUP shares declined 18% during the nine months ended 12/1/09 but have increased 6% during the past two months. I believe the U.S. dollar will continue to rise. The U.S. economy will likely improve while some European and the Japanese economies stumble along. The purchase of UUP will neutralize the volatility of common stocks and will offer a hedge against a possible fall in stock and bond prices.
Conservative investors typically buy stocks and bonds. Bond and bond ETFs are usually another good way to hedge against stock market losses. However, bond prices are very high and could fall when U.S. interest rates begin to climb. I still hold some bond ETFs, but I am avoiding new bond ETF purchases. I prefer to buy gold and U.S. dollar ETFs in the current market environment.
J. Royden Ward
For Cabot Wealth Advisory
Editor's Note: You can read more about conservative investing and get continuing coverage of SPDR Gold Shares ETF and PowerShares Deutsch Bank U.S. Dollar ETF in the Cabot Benjamin Graham Value Letter. Roy's Classic Benjamin Graham Value Model stocks have soared 86.4% during the past 12 months. And his ultra-conservative Wise Owl Model stocks have increased 58.4% during the past 12 months. Now that's impressive! Don't miss out on his next recommendations. Click here to get started today!