Sunday, February 16, 2014

Talking Head Simon Hobbs Embarrasses Himself On CNBC At The Gold Bottom

I want to take a minute to review the video below because I hope it helps illustrate the incredible danger the average investor faces by watching too much CNBC.

A guest on the show said that he recommends clients hold 10% of their portfolio in precious metals related assets. He also recommends that investors rebalance their portfolio to keep that number at 10%.

Let's say that you have a $100,000 portfolio. We'll leave out silver and mining stocks and just use physical gold in this example to make it easier to walk through.

In 2000 the price of gold was at $250. It rose for 12 straight years entering 2013, peaking at $1,900. If you just held your original investment without rebalancing, your $10,000 in gold rose 760% to $76,000 at the peak. However, if you were rebalancing on December 31 every year and taking profits, then your return would be lower than 760%. After 12 years of rebalancing you would have $10,000 in gold and $20,060 in profits.

In 2013 gold gets clobbered. It falls 28% on the year. Your $10,000 in gold is now worth $7,200. If you continue to rebalance entering 2014, you now add $2,800 in gold to your portfolio. This means you now have $10,000 in gold and $17,260 in profits ($20,060 - $2,800 = $17,260).

Your gold investment is up 272% over 13 years after an earth shattering decline in prices.

The video below struck a chord with me because this 10% holding and rebalancing strategy is something I recommend to a lot of people who ask me for investment advice. Since 99.9% of the public holds 0.0% of their portfolio in precious metals, a 10% holding is a major shift. I hold a substantially higher percentage of precious metals in my personal portfolio, and I increase that percentage far more during the major sell-offs which I view as a gift wrapped in a bow.

With this conversation in mind, watch the video below where Simon Hobbs rudely attacks the guest for advising this 10% rebalancing strategy. The interview took place on December 13, the day that gold bottomed in price. The mining shares, which he recommends adding to balance the portfolio, are up 30% to 300% since the low that day.

CNBC should be thought of as poison for the mind and looked at only as a case study on behavioral psychology and herding behavior.



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