Is Another Bubble About To Burst?Posted by Phil Ferguson on January 26th, 2010 – 3 Comments – Posted in Economy, Stock Market
NOTE: This post is part of an ongoing education series. This information is for educational purposes only. This information does not constitute investment advice. No rational person would make investment decisions based on a blog post. Please consult with your financial advisor before taking any action. If you think it is OK to make investment decisions based on a blog post, then for the love of the FSM – Stop reading my blog.
Fortune has an interesting story on 4 possible bubbles. The four areas of concern, as they see them are: Gold, Oil, Treasuries and Stocks.
Gold – I have never been a fan of “investing” in gold. It is a commodity and has very serious price fluctuations. However, over long periods of time gold does hold its value. You may have heard the catch phrase, “Gold is a hedge against inflation.” That is to say, what you could buy with an ounce of gold in 1920 you can also buy with an ounce of gold in 2000. You will not lose ground to inflation nor will you beat inflation. As the price goes up companies can afford to get more gold out of the ground. We could be looking at a bad combination of people chasing “what is hot” combined with new production hitting the market. If some investors get spooked the price could fall quite a bit. If you really, really want to put 5% of your money in gold – I could live with that, just don’t do it after the price has doubled in just a few years. Even better, skip gold and do some real investing.
Oil – Some of the same logic applies here. Remember, oil was $150 a barrel about two years ago and predictions were that it will go to $200. Well, it went to $50. Now oil is back to $75. Will it go up or down from here? Who knows? There is this old joke about oil, “What price does OPEC want for oil each year? $100, $100, $25, $100.” The occasional drop in prices keeps us addicted. This is not for the faint of heart or the rational, in my opinion.
US Treasuries – This one should worry the average investor. If you are looking for more stability and are ok with lower returns, treasuries can be a good place to go. However, low interest rates (current FED funds rate is 0.25%) have made it easy for banks to borrow cheap money and buy treasuries. The high demand pushes up prices and lowers the yield (current 10 year yield is around 3.6%). Remember, bonds are a little tricky because as the price goes up the yield goes down. When the Fed starts to raise rates, treasuries will look less attractive and the bonds you already own could take a beating. Keep an eye on how much of your portfolio is in bonds and shy away from long bonds (ten years or longer maturities).
Stock Market – While the market made a nice return in 2009 (S & P up 26.5% for 2009) it still has a long way to go to make up for the almost 40% loss in 2008. I don’t expect any big returns in the next few years and I think the odds of a full blown double dip are very low. The stock market is the best place to go for long term investments (10+ years). If you planning on adding money to the market at this time, think about putting in 10% each month over the next 10 months.