Diversify: Excellent strategy, bad tactic

The headline of Debbie Bradley’s front page article in the Oct. 14 issue of Numismatic News perfectly captured an essential strategy of smart investing: “Take Steps To Diversify.”. However, we only had to reach the second paragraph to get one of the worst tactical recommendations I’ve ever come across.

Mike Fuijenz, president of Universal Coin and Bullion, says “take 20 percent of your money out of the market and put it into gold.” Mr. Fuijenz goes on to caution us not to go overboard by putting “50 or 100 percent of your money anywhere unless you’re a speculator.” Well, a concentration of 20 percent in any one investment certainly qualifies as speculating and flies in the face of sound diversification.

I can see where Fuijenz is coming from. After all, he’s in the business of buying and selling gold. What a nice favor you’d be doing him and other sales folks like him if you followed his recommendation. Good for his business but let’s face it. He’s not serving up impartial investment advice.

But let’s move beyond Fuijenz’ self-serving tactic and explore a number of reasons why making a big bet on gold (and, yes, 20 percent is a very big bet) is a really dumb move.
1) It’s too late. The time to buy gold is behind us. About two years ago would have been perfect timing. Today, gold is about 21 percent off its recent peak and down 10 percent since this Numismatic News article was written. Of course, no one knows what gold prices will do in the future.

However, just look at the price of a barrel of oil. It’s a broadly used commodity whose price has collapsed 50 percent in just a few short months. That’s a real possibility for gold as well. Remember what billionaire investor Warren Buffet tells us. Sell when people are euphoric and buy when there is fear and panic. Euphoric gold cheer leaders like Fuijenz and those who take his advice stand a very good chance of finding themselves trying to “catch a falling safe.”

2) Get out of the market now and you’ll lock in your losses. The name of the game is not to buy high and sell low but that’s exactly what you’ll be doing if you take any money out of equities right now. You wouldn’t sell your house just because it dropped dramatically in value. So, why would you sell stocks just because they have plummeted.

Also, if you study the history of stock market crashes you’ll find that every time stock prices rebounded with a vengeance and sometimes as quickly as six months. Put aside your fear and don’t buy into the “this time it’s different” doom and gloom prognostications. If it really is different this time (and it isn’t) it won’t make any difference where you invest.
3) Gold has been a terrible long-term investment. It took gold about 27 years to again reach the peak it achieved in 1980. Had you invested in gold during this period you would have walked away from spectacular stock market investment returns. Just putting your cash into a money market fund would at least have earned you some interest. Also, when selling gold bullion (and sometimes gold coins) you incur additional assay expenses. Oh, and did I mention storage and security costs?

4) A 20 percent position in any single investment is way too much concentration. You should always limit your exposure. This is the fundamental thinking behind diversification. Unlike Fuijenz’ 20 percent recommendation the most you should ever have in a single, concentrated investment is 5 percent. Low cost, no load mutual funds are a perfect way to achieve diversification, and you can even find funds that include gold and gold mining stocks in their portfolio. Now that’s a lot easier than dealing with the physical product. The biggest decisions center on which mutual funds to own and the appropriate split of your total investment dollars between equities and bonds.

As a coin hobbyist I care most about the individual pieces in my collection and the pleasure I derive from each. Any price appreciation I receive is just icing on the cake. Please don’t confuse your hobby interests with your investment well being. That’s a losers game.

Bill Green is a hobbyist from Alamo, Calif.

Viewpoint is a forum for the expression of opinion on a variety of numismatic subjects. The opinions expressed here are not necessarily those of Numismatic News.
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