The advice to use diversification is probably the oldest investment advice (right after “don’t loan money to your relatives”). Diversification in precious metals can mean several things. It could mean spacing out your money among different metals (some precious metals and some base metals). It could mean spreading your money among different classes of investment vehicles (a mix of gold and silver mining stocks along with a precious metals mutual fund). For speculators, it may mean deploying strategies that could benefit in up or down markets (such as using an option combination like the long straddle; see Chapter 13).
You can even diversify when you’re speculating on a single vehicle. In 2019, most of my clients with commodities accounts were overwhelmingly in silver futures options. It is indeed a high-risk approach, but it paid off very well. Silver that year ended up 45 percent, and most of the silver futures options were up in triple digit percentages (sweet!). But where possible, the options strategies involved a diversified mix of strike prices, time frames, and some hedging. All hedging means is that you do something in the account that could do well if the market goes against you. Hedging is covered in greater detail in Chapter 14.
Since this book covers the world of precious metals, I can cover diversification in this area, but it’s important to understand that this singular area should be only a single slice of your total financial picture. You need to address other areas of your situation such as
Money in savings
Reducing and managing liabilities (such as debt and taxes)
Money in conventional investments such as stocks and bonds
Real estate and other tangible assets
Insurance and other risk management tools and strategies
Pension matters and retirement security
It’s not a complete list, but it’s important to point out that whatever you do in precious metals, it doesn’t happen in a vacuum. Hopefully you’ve looked at your entire financial picture and the economic/political landscape and you’ve discovered that the best way to protect and grow your wealth in these times is by diversifying into precious metals!
You can add precious metals into your portfolio to gain benefits that may not be there with other, more traditional investments
You can be diversified inside the precious metals portion of your portfolio by having both physical metal (such as gold and/or silver bullion coins; see Chapter 9) and paper investments (such as mining stocks and precious metals exchange-traded funds [ETFs], covered in Chapters 7 and 8, respectively).
Keeping some risk management tools in your arsenal
Buy 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.
Weighing Risk against Return with the 10 Percent Rule
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.
Table 4-1 is a neat summary of the major ways you can get involved in precious metals based on risk. Use it to leapfrog into your investment of choice or, more appropriately, where to get more details.
TABLE 4-1 Risk Levels of Precious Metals Investments
| Type/Category | Relative Risk Level | Most Common Direct Type of Risk | Chapter with Details |
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