Precious Metals Investing: How Much Is Too Much?

| October 27, 2010 | 0 Comments

A few days ago I was in the office working away analyzing the markets.  My favorite tunes were blaring through my iPod as I flipped through chart after chart.  It was just like any ordinary workday.

But then something interesting happened.  Something that left me shaking my head in disbelief.

It all started when the FedEx man delivered a package to the office…

I walked up to the front desk to meet him.  I could tell he was a nice guy and happy in doing his job.  He was rather talkative and had some questions.

I signed his little computer keyboard thing as he asked, “What do you think about the markets?”

I didn’t really feel like going into all the details.  So I replied with a smile, “They’re looking strong right now.”

But I could tell this wasn’t the answer he was looking for.  It wasn’t long before his next question…

“What about precious metals?”

   I told him I liked the fundamentals for the long run.  But before I could add anything else he responded, “That’s what I thought!  I just put my entire portfolio into precious metals the other day.”

Before he could see me wince, he was out the door delivering his next package.

I stood there holding the package shaking my head.

What’s the point of this story?

Well, first of all, let me tell you this…

I really do think holding a portion of your investment portfolio in precious metals is a great idea.  The fundamentals for precious metals like silver really are very good.  Industrial demand along with a weak dollar is likely to send prices higher in coming years.

But notice I said “a portion”…

As with any investment, you shouldn’t dump your entire portfolio into precious metals.  I don’t care how convinced you are of their upside. Dumping all your money into any one investment is a recipe for disaster.

Why?  Let me explain…

If you go “all in”, you’re only accounting for one outcome.  Of course, the outcome in the FedEx man’s case is for precious metals to “go to the moon”.  If he’s right, he’ll make a fortune and be the envy of all his colleagues.

But what if he’s wrong?

What if precious metals for some reason don’t go to the moon?  Or maybe they do go higher, but come back down before he can take profits.  He’ll be sitting on a bunch of very expensive paperweights.

Who knows, the U.S. government may decide precious metals are no longer fit for the American investor.  They may call for immediate redemption.  In other words, take everyone’s precious metals. (They’ve done it before with gold.)

Or what if a fundamental shift happens in the market?

Maybe silver will have 50% of it’s industrial uses replaced with a new compound grown in a lab.  The demand destruction would knock the spots out of silver prices.

Who knows… Anything is possible.

My point is this…

You can’t possibly account for all future outcomes, whether it’s in investing or life in general.

But by going “all in”, you’re basically saying you can predict the future.  You’re so certain of a particular outcome you’re betting it all.

As a seasoned professional, I can tell you investing doesn’t work this way.

There’s absolutely no certainty in investing.  No matter how strongly you feel about an investment, you should never dump all your money into one trade.

In the FedEx man’s case, he should put no more than 25% (still a gigantic amount) of his portfolio in precious metals.  And that’s if he feels absolutely certain prices are going higher.

This way he won’t be ruined if things don’t turn out like he thought.

After all, it wasn’t long ago when real estate was considered the “can’t lose investment”.  People were going “all in” on houses across the country investing in real estate which would “only rise in value”.

We all know how that ended…

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Category: Commodities

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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