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Don’t follow the herd

(even if they seem to be following a road paved with gold.)

Most folks tend to follow a herd mentality. Like sheep, they run together, hoping, we guess, that staying in a group will help them avoid the wolves. In the financial world this rings particularly true. Investors tend to run together, hoping to avoid financial losses. This herd mentality can be seen in any specific investment category.

Years ago, we had a 57-year-old doctor client come into our office and insist that all his money be put into tech stocks. Six months later, the Clinton-era bubble burst and the client’s holdings lost over 50% of their value. We have seen the same scenario carried out in various sectors over our 30 years in practice. Most recently, the masses wanted to over-allocate their holdings in the housing sector.

 

We had one client take all of his money out of stocks and put the cash proceeds into an $800,000 Wilmington, North Carolina beach house. “Housing can only go up,” he said. Well, that house is now worth about $480,000 and that’s only if a buyer steps forward. What was the result of his miscalculation? The 67-year-old and his wife have un-retired and gone back to work full time to try to pay the mortgage on their “can’t lose proposition.”

This brings us to the question of the month…

 

“Dear Dan and John: Everyone I know is now saying, ‘Buy gold! Buy gold!’ But, I’m not so sure. What do you guys have to say on the matter?”

Signed, Bill Miner

 

Dear Mr. Miner: Well, when everyone says buy X, it probably means you should do extensive research on X before pursuing it and that’s our opinion on gold. According to the October 4, 2010 issue of Investment News, “During the decade since it last hit bottom, gold has gone from about $250 an ounce to more than $1,300.”  So, a lot of the gains may have already happened. Could it go up more? Sure, but it seems to us that the down side may be greater than the upside.

The article, by Dan Jamieson, goes on to remind us that gold has very little intrinsic industrial value (i.e. it’s infrequently used in manufacturing, except jewelry). And, according to Jamieson, gold is also not an inflation hedge. So maybe, put a little gold in your portfolio, but our best advice is to not buy into the herd mentality and, instead, choose investments based on your specific situation and goals.

 

Dan Searles and John Stohlman, of Medallion Financial Group, are CFP®’s and Registered Representatives with over 25 years of experience in the financial industry. Securities and advisory services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Adviser. Medallion Financial Group and NPC are separate and unrelated companies. They manage over $250 million of client assets. For further info, questions or comments regarding this article, Dan and John can be reached at 1-800-878-9704 or Dan.Searles@natplan.com.

 

Although the opinions expressed are based upon assumptions believed to be reliable, there is no guarantee they will come to pass. The views within do not express the opinions of NPC.