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Investing During Four Asset Bubbles: Don’t Blow It

This article was written by in Investing. 33 comments.


Earlier this month, I stopped my automatic monthly investment of $1,000 in the stock market through Vanguard’s Total Stock Market Index Fund (VTSMX), and it’s possible that this will prove to be a good decision. Shawn Tully from Fortune Magazine identifies four current asset bubbles that all investors should heed, and one of these bubbles is the stock market.

I began my monthly dip into the market with an investment in stocks through my SEP IRA last year around the end of March, so I benefited from one of the lowest recent points to get in the market. I followed that with the automatic monthly investment in my non-retirement account. Through 2009, I was dollar-cost-averaging as the stock market and the price of VTSMX increased.

According to Shawn Tully, you should avoid investing in the stock market, Treasuries, gold, and oil. These investments have all climbed too high recently although the recession is not too far in the past. For stocks, Tully looks at the market’s overall price to earnings ratio, which is historically high right now. This means that companies’ earnings are not high enough to justify the price of shares.

Here is the author’s warning about gold:

Prices are so high all over the world that people who once treasured their gold jewelry are now rushing to sell it. Swiss refiners are offering irresistible prices for bracelets and brooches, “cash-for-gold” stores are in Chicago malls, and suburbanites are hosting Tupperware-style parties where neighbors show up to hock their gold teeth.

When this happened in the early 1980s with silver, prices plummeted from $50 to $15 in less than a year. Look for gold to end up below $500 an ounce within two years.

Are you investing in the stock market or in gold right now?

Published or updated January 29, 2010. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 11 comments… read them below or add one }

avatar Investor Junkie

I have in the past but stopped in all three over 2 months ago. I still have positions in all, but not adding any new money.

Paying off some low/no interest debts instead are yielding a better return.

Short term I’m not bullish with gold and think silver is a better trade right now. Long term both make sense based upon economic policies.

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avatar SteveDH

With two quarters of economic growth I am fairly bullish but since I’m retired I’ve halted regular investments except for reinvesting dividends & interest. Excess income is currently being put into I-Bonds as I monitor my portfolio trying to recover. Bold moves, after retirement, are pretty much out-of-the-question so withdrawing large positions seems unwise. Keeping up with allocations (diversification) should be a constant excercise when volatility is high and I do that regularly.

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avatar KC

In the past couple of months (since early Nov) I’ve been a seller. The market has had a good run and is slightly over-valued right now, IMO. We’ve recently (the last 2 weeks) had a correction. So I’m starting to buy. I keep a running list of stocks I have my eyes on – its about 20 or so stocks that I view for various reasons. I keep a notebook with a short entry on why I find that stock attractive. Anyway some stocks are still riding high (a lot of energy stocks). Some are hitting lows again and don’t have a bright future for now (telecoms). But some are beat down unnecessarily (XOM, GOOG). Those are the stocks that are attractive right now. XOM is as low as it was last March during the depths of the recession.

I’ll buy gold if it gets around $900. And even then it will likely be an etf that will be 10% or less of my total portfolio.

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avatar Steve

If you’re not supposed to be in those four assets, what is left? Bonds, REITs? Or just cash and sit out until his expected corrections?

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avatar Investor Junkie

It’s funny you say REITs. Depending upon the type, I think they could be a good investment.

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avatar Tom

I have not changed my dollar cost averaging. I don’t believe in that I can predict the market on a consistent basis.

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avatar Erica Douglass

Harry Dent calls it again…he said there would be a commodities bubble after the stock market crash. I did buy gold quite a while ago on his advice and plan to sell if it hits $1700/oz. or more.

I agree with you and others; I don’t think the time is right to invest right now. I actually have a doubleshort ETF position open–although I opened it too soon, so it’s still negative.

You know, they say “As January, so goes the year” and January was down over 2% (S&P 500.) I’m staying put for now.

-Erica

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avatar Jim

“the market’s overall price to earnings ratio, which is historically high right now.”

While I agree that stock market is not a bargain right now I really don’t think P/E ratios are at historical highs right now. S&P 500 P/E was >100 in the summer and has dropped since then. It should be in the 20-30 range when Q4 results are all counted up. So while I don’t think prices are bargains right now I also don’t think its the top of a boom by any means. As more and more positive earnings results come out and its all added up I think we’ll find were in the historical average situation for P/E’s.

I definitely think gold is due for a bust.

Just my 2¢ of course.

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avatar Doug Digger Eberhardt

I addressed the gold aspect of Tully’s Fortune article here: http://fedupbook.com/blog/gold/gold-below-500-an-ounce/

I also suggest people switch to buying gold in Euro’s mid November. The EURO had no reason to be approaching its all-time highs back then.

Regarding the stock market I agree with Tully. P/E ratios are historically high if you follow Ed Easterling’s writings and research. He wrote the book, “Unexpected Returns.”

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avatar Kelton

Gold (precious metals) could be due for a correction, but let’s not call it a bubble.

Back when tech was in a bubble, EVERYONE owned those stocks… the custodian, secretaries, bus driver… etc.

When real estate was in a bubble, same thing… who wasn’t buying into real estate?

With precious metals, I can’t find ANYONE who owns metals in any fashion. Yes, I do know that it is more popular than it has been in the past, but it is a micro-fad at best.

Cash-for-gold is for people to *sell* their gold …. not to buy it. There are a few commercials hawking bullion, this is true. Still, it has not exactly swept the nation… not at all.

If it ever does become as popular as real estate or tech (or even 1/4 as popular), there is no telling how high metals could go. Unlike stocks, there is a severely limited supply of metals and it could react strongly if it ever becomes popular.

I hope you are right, though. If gold or silver ever drop precipitously, I’m going to be an enthusiastic buyer!

I am on the sidelines anticipating this downward move. In fact, I have been on the sidelines since early summer ’09 because all analysts were predicting a downward correction in October… then November…etc.

Nope… it has gone up, up, up.

I feel like a fool as I continue waiting for that correct, but here I am!

The latest downward move is typical of metal…. it jerks around in this range easily… it isn’t significant enough.

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avatar Britt

I’ve been building up cash for over a year now. I bought a block of Nike shares at $41.75 in Feb 2009, and since the ensuing market rise, I haven’t had an inclination to buy anything else. I agree with the assessment that gold, oil, and stocks are in a bubble. But I think treasuries will become a safe haven when the next credit crisis strikes. I’m saving cash to invest in individual stocks after the market corrects from its current bubble… It’ll also be nice to see oil fall down to reality and save a few bucks on gas!

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