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Posted: 6:00 a.m. Tuesday, April 16, 2013

Clark's golden rule for investing in gold

By Clark Howard

It's so weird that I had just recently warned listeners about the risk of bubbles, specifically those in the gold market. Now gold has fallen from its peak and is down to roughly $1,360 an ounce after highs of $1,920.

Did I have a crystal ball? No way. It's all about basic market fundamentals and the nature of bubble markets.

The problem with bubbles is we get too caught up in the frenzy of the moment. It's so hard to know in the shorter term which way things are headed. Many people have become true gold bugs believing that gold is the one safe haven that will go as high as the sky. And with modern trading methods, you have so many opportunities to make a quick decision when you're watching the price of commodities fluctuate.

In the same way, I think about when stocks were in the toilet a couple of years ago and people rushed to sell like they were getting off a sinking ship. If they had just hung in there, they would have made back all their money…but they missed the run-up.

Human nature makes it hard for us to make long-term rational decisions!

Now, I am the dullest guy you'll ever know. I have no idea about movies in the last 10 years, no idea about hot music acts and I'm basically clueless on all popular culture. But one thing I have a sense about is the long term, as in investing with the goal being down the road.

If you diversify your portfolio far and wide (small companies, mid-sized companies, large companies and international) through index funds and ETFs and  you dollar cost average (contribute equal amounts each pay period), you'll come out ahead in the long run.

Don't try to figure out the flavor of the month; leave that to Baskin Robbins! Too often when you buy the latest, greatest, hottest commodity, the big run-up is already over and you're just in it for the decline.

If you do want to buy gold, buy it in dribs and drabs and make it no more than 5% or 10% of your overall portfolio; don't take everything you've got and pour it into gold or other precious metals.