After the tech stock bubble in 2000 and our recent real estate debacle, it’s natural to begin wondering about what the next market bubble might be and when it might occur.

The recent bank, automotive and insurance bailouts coupled with the $700 plus billion stimulus package, expanded Federal budget and plans for what will surely be a costly national health care system have raised fears about higher interest rates and inflation. As a result, there’s lots of talk about gold as the investment of choice. It’s quite common to see gold being hawked on TV and to hear people boast at cocktail parties that they’ve taken a position in the precious metal!

Studies have shown that owning commodities can reduce portfolio volatility while at the same time increasing returns. All too often, however, investors get burned by following the hoards chase the latest hot investment, buying more and more as the price soars higher and then lose a substantial portion of their investment as the price comes crashing down.

To avoid getting caught in the next bubble, make sure your portfolio is well diversified. Set target allocations for each asset class and target prices for any individual stocks you own. When target allocations are exceeded, trim back holdings to the target level (i.e., sell high) and when target prices for stocks are reached, sell those holdings. If you can be disciplined to follow these guidelines, it will go a long way to reduce the impact of the next market bubble, whatever and whenever it may be.