Three New Investing Bubbles to Be Wary Of |

Investors over the last ten years have learned an important lesson about bubbles in different categories of investments-stay away! Bubbles can be thought of as a time of rising prices in a particular type of investment–think of technology stocks in the late 90’s or real estate just a few short years ago. A lot of money can be made investing as a bubble is growing, but many times investors get into the game too late or fail to get out while their investments are profitable.

Bubbles are driven on emotion. They usually begin with a rational basis for growth potential but grow into frenzy as more investors want to participate in the growth. Although some lessons have been learned during the last few bubbles that have burst, there are some new areas of growth that have the potential to become bubbles. 401K balances are a popular place to chase the hot sectors, but before you adjust your 401K holdings, consider the risks in these three “hot” asset classes.

– Commodities: Commodities are the materials that we use everyday and their prices are driven by a number of factors. As the dollar has weakened, prices of materials like precious metals and oil have increased dramatically. The price of an ounce of gold has surged 44% this year, while copper is up more than 50% in 2009. With commodity prices near record highs, money continues to pour into them daily. As an investor considering an investment in gold, think about the fact that you’re buying at a time when gold prices have never been higher. There certainly could be a place for gold or other exposure to commodities in a well-rounded portfolio, but have an exit strategy in place in case the rise in commodity prices turns out to be a bubble that could eventually burst.

– International Equity and Real Estate: There are really exciting developments happening in China, India, and other developing countries that will results in huge business and investment opportunities in the future. With billions of people working and living in these developing economies and the dollar getting weaker compared to other currencies, the growth potential is definitely intriguing for investors. However, the amount of money pouring into emerging market funds (over $50 billion in 2009 already) and ETF’s should make you reconsider before moving your entire 401K balance to the emerging market fund. The broad-based index for emerging markets is up 60% this year and index funds for particular developing countries are even higher. As an investor, you need to weigh the exciting growth potential for these types of funds against the flood of speculative investor money that has already poured into these countries.

– Short Term Bonds: With literally trillions of dollars in cash on the sidelines and interest rates paying people holding cash almost nothing, many investors are looking for the next-safest option for their cash that provides a little return. Short term, limited duration bond funds have become extremely popular this year as cash alternatives because they offer a decent yield (currently between 3% and 5% typically) and the perception of safety. As an investor, you have to be careful following the herd, even into a low-risk investment. As rates begin to improve and money starts to flow out of these funds, losses could be created that investors aren’t accustomed to in short term bond funds.

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