by Archie M. Richards, Jr., CFP^®
April 17, 2006

A headline in the April 11, 2006 issue of The Wall Street Journal reads, "Rush of Investors to Commodities Fuels Gold Rally."

Unless you're a long-term commodity investor, this headline signals to get out of both commodities and gold. Whatever investors are clamoring for, go the other way. You'll be amazed how many losses this will save you. (The night before the headline, oil closed at $68.74 a barrel and gold at $597.60 an ounce.)

Assume that in the short term, this selling advice proves wrong. Sell anyway. Investment predictions are never exact. You have to go with the odds. When investors are rushing into any investment, the next major move is likely down.

But if you follow my advice, beware of a trap: Let's say my timing is off and the prices of oil and gold continue up for a while. Because of this column, you got out too soon.

That's when emotions kick in big time. Let's assume it was gold you sold, and the price continues upward. You check the price every day, upset about what you're missing. Even worse, your friends bought gold when you did, and they're still in! They're making money, and you're not. It's like someone's cooking a steak that smells delicious, but you can't have any of it.

"I was stupid!" you say to yourself.

Here's where the trap closes: You can't bear watching the price continues rising without being in. You say to yourself, "I see on television that the government thinks gasoline prices are going to stay high this summer. Hurricanes are bad these days; another one might wipe out production in the Gulf again. If the U.S. bombs Iran's nuclear facilities, oil will soar."

You figure you made one mistake by selling too soon. You don't want to make another by remaining out. You buy gold again. And that's the day the price starts falling for good.

On the upside, you suffered opportunity losses while you were out. On the downside, you're suffering actual losses while you're in. Now you have two reasons to think you're stupid.

Not only have you lost, you're miserable. This is when you lose your confidence and start doing things successful investors do not: You talk too much about your investments and no longer stay within yourself. To make up for your loss, you buy mutual funds whose recent performance has been good. You reach out for newsletters that advertise fabulous records. Most importantly, you stop diversifying and trade more in investments that are hot. The result; more and more losses.

Thousands of investors have gone through these agonies, including many who bought so-called growth stocks in 1999 and got creamed during the next two years.

You have to go with the odds. The time when people rush into an investment is the time to get out. If the majority is buying gold now, they'll have no one to sell to later on at higher prices.

When should you buy? A true story provides the answer: In 1980, gold hit $847 an ounce. It then fell for many years. One day, I was listening to a television commentator report how the market had performed that day. She ended by saying that gold had closed at $298 and added, not from the script, "As if anyone cares."

"Bingo," I said to myself. "Nobody cares about gold any more. It has to be a buy." And it was.

Assume you're going to be wrong in the short term. This makes it easier to accept when you do in fact turn out to be wrong. If your timing about selling was correct, tell yourself it was just luck. Don't build expectations that your investment judgments have to be right on the button.

You bought gold because it looked like it would be hot. You did a good job and came out a winner. Now, follow up one good move with another: Sell it.