The old adage goes that if your cab driver starts giving you investment tips, there may be a bubble. Unfortunately, bubbles aren’t recognized until well after they’ve popped. What’s an investor to do?
Commodity prices have soared this year, but we don’t have to tell you that. You and millions of other investors have no doubt noticed:
- iPath DJ-UBS Sugar ETN (NYSEArca: SGG) is up 122% in the last six months
- ETFS Physical Silver (NYSEArca: SIVR) and iShares Silver Trust (NYSEArca: SLV) are both up more than 80% year-to-date
- ETFS Physical Palladium (NYSEArca: PALL) is up nearly 80% in the last six months
- PowerShares DB Agriculture (NYSEArca: DBA) is up nearly 35% in the last six months
Whether this is a bubble, though, isn’t easy to say.
Bubbles can form for any number of reasons, including the return of inflation, rising interest rates, doubts about an economic recovery and panic selling. [When It Comes to Gold, the 200-Day Says It All.]
But not knowing if there’s a bubble and even less so when it will pop complicates things for anyone who owns the asset class in question. There’s one easy way to cope: You can protect your portfolio from possible bubbles by utilizing a simple strategy. The one we use is trend following, which involves the 200-day moving average. [Read Our Trend Following Guide.]
The sell strategy serves to give you some downside protection while enabling you to take part in any uptrend. It also helps lessen the impact of emotions, which often happens in bubbles as investors get attached to their positions and don’t recognize when it’s time to back away.
For more information on following trends, visit our trend following category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.