Investing in Gold & Silver For Dummies - Paul Mladjenovic

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the dips. If you bought what you think is a great stock at $10 per share and a correction sends it down to $8, don’t just crawl under a rock and wait it out; if possible, buy some more. Why not? If it’s truly a great stock and your research and logic tell you it’s still a solid investment, buy some more. Ultimately, time will pass, and the odds are good that when that stock goes to $12 or $15 or more, you’ll end up saying, “Gee whiz! I could have had it at $8!” No guts, no glory.

       Keep cash on the sidelines. This goes in tandem with the preceding point. Have some money sitting somewhere safe, liquid and earning interest waiting for an opportunity. I tell my students that if they’re ready to take the plunge with, say, $10,000, don’t invest everything in one shot. Invest half now and stagger the rest in over a few weeks or a few months. Opportunities go hand in hand with risks, so do the Boy Scouts thing and be prepared.

       Use stop-loss orders. If you have a brokerage account and it’s a major firm with a full-featured website, it has some excellent risk management tools available for you. The most commonly used tool for keeping your portfolio’s value intact is the stop-loss order. If you bought a stock at $10, then put a stop-loss order in at, say, $9, or 10 percent below the purchase price. That way, if the stock goes up, there is no limit to the upside, but if the stock goes down and hits $9, a sell order is triggered and you get out. You minimize loss. A stop-loss order can be activated for a single trading day or for an extended period of time (referred to as a GTC order, or “good ’til canceled” order). Stop-loss orders are a common feature in a stock brokerage account, but it may not be in a commodities brokerage account. Find out more about brokerage accounts in Chapter 16.

       Use put options. Put options are a great way to protect your investment during corrections or bear markets. They can be used as “insurance” to protect gains or the original principal. The put option is also used as a speculative vehicle to make money as well, but it’s included in this chapter as a risk management tool. It’s covered in detail in Chapter 13.

      I realize that after reading an entire chapter on risk, you may think it’s a terrible concept; however, some things in this world thrive on risk. The world can be an uncertain place, and many potential events and entities out there have no problem with raining some bad news on the U.S. economy in general (and your portfolio in particular). When those types of risks become evident, precious metals revert to their historical role as a safe haven. Without risk, how can you grow your money faster? It’s a necessary part of your success, and in many cases, it’s the reason for your success.

      

To offset some of the risk potential that is inherent in any place you put your money, use a very simple criteria. The most you should have in any single vehicle is 10 percent of your money. Easy! Yes, you could make it more precise, more customized, and more complicated. Go ahead, but it’s good to have a starting point and a simple strategy before you start to tweak and “optimize.”

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Type/Category Relative Risk Level Most Common Direct Type of Risk Chapter with Details
Physical
Bullion coins and bars Low Market, physical 9
Numismatic and collectible coins Medium Fraud, physical 10
Paper
Major mining companies Low-medium Market, political 7
Midsize mining companies Medium-high Market, political 7
Junior mining companies High Market, political 7
Mutual funds Low Market, political 8
Exchange-traded funds (ETFs) Low-medium Market, political 8
Leveraged ETFs High Market 11
Futures Highest Market, exchange 12
Options: covered call writing Low Market 13
Options: buying calls and puts High Market 13
Digital
Precious metals cryptocurrencies Medium-high Market