Last Updated Nov 9, 2010 9:43 AM EST
When I left the floor of the COMEX in the early nineties, gold was dead. Soon the investment world was captivated by dot-com and telecom stocks and few extolled the virtues of the yellow metal. But when the boom turned to bust, I started to think about gold again. After all, Alan Greenspan's Federal Reserve was slashing interest rates and all of the sudden, the idea of a falling dollar and future inflation wasn't so crazy.
I started to accumulate gold through exchange-traded funds like GLD and IAU (here are the five worst ways to buy gold). I wasn't a gold bug who feared hyper-inflation and the collapse of the monetary system, rather I saw gold as a way to buy a tiny piece of security in an insecure world. As I explained to my clients at the time: if I'm wrong about gold, the rest of your portfolio will do well, and if I'm right, then you won't lose as much overall.
I have owned a small position in gold (approximately 5 percent of my portfolio) ever since and the cool thing is that by rebalancing my portfolio on a regular basis, I have sold and locked in profits all the way from $300 to today's record-setting level of over $1400 (this is a nominal record --the all-time high for gold was in 1980, when it hit $825.50 an ounce, or the equivalent of about $2,200 in 2010 dollars). I have also been forced to buy when the price has fallen and I needed to add to the position to remain at 5 percent.
With gold at current levels, I need to sell today so that my allocation remains in check. You might think that with gold up another $16 today, I'm tempted to wait for further gains. But that's not the lesson of a disciplined investor--there's a reason that the old Wall Street chestnut, "bulls and bears make money, but pigs get slaughtered" exists!
By sticking to your target allocation, you'll make plenty of money on the way up and hopefully save yourself a few bucks on the way down. Your imposed discipline has another side benefit: you don't have to know the top or bottom of a market, whether the dollar is going to get shredded or if inflation is the next bogeyman for Mr. Market -- you can make money throughout the ride.
Image by Flickr User Mykl Roventine, CC 2.0