From 2001 through 2010, the price of gold reached new heights. Morningstar’s category of precious metals funds, which invest most of their money in gold mining stocks, gained over 25% per year, on average. A $10,000 investment in the average precious metals fund would have grown to over $90,000 in those 10 years.
This phenomenal performance cause many people to invest in precious metals funds in 2011, only to see the average fund in that category drop by about 21% in 2012. If you invest $10,000 and see the shares’ value drop to $7,900, you need a return of over 26%, just to get back to where you started.
Such behavior is common for investors. Many people not only buy what’s been hot, they put a great deal of their money in that asset. Then they take huge losses when there’s a correction in that category.
Therefore, diversification is crucial for investors. Buy some bonds or bond funds as well as stocks. Within stocks, hold a mix of industries. Even if one of your investments falls, others might gain or hold their own. Try to prevent a steep loss in your overall portfolio, which will make it difficult to make up lost ground.
