So gold and silver prices are zooming up, and everyone wants a slice of the metals in their portfolio. Here is a checklist before you buy gold and silver for “diversification”.
1. Did you know that the worst time to buy an asset or commodity for the first time is when everyone is talking about it and prices are soaring? Why? Because almost always Murphy’s law of investing will strike. It will start falling after you buy.
2. Google for “Gold/silver price chart” and study the chart carefully. Do not get distracted by the recent movement. Look at the past. Look at how often and for how long the metal has been underwater – that is, below a previous maximum.
Historical gold and silver prices in INR. The short horizontal line and arrows mark the bear market followed by a rally in metal prices. Although no one can predict the future, it would be best to expect a similar trend once this rally runs out of steam.
3. Ask yourself, why do you want to buy now? Why did you not want to buy the metal when its prices were underwater?
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4. Do you really think the price of any tradeable commodity will always keep increasing? Do you have the emotional bandwidth to handle a crash, especially if it happens soon after you buy?
5. If you want to include gold or silver or both in your portfolio, will you reduce equity or fixed income? If you reduced equity exposure, how would you react if the stock market zoomed up?
6. Do you really know what the words “hedging” and “diversification” mean? Do you know how to measure these when you add gold or silver to your portfolio?
7. Did you have an asset allocation in mind before you wanted to buy gold and silver? How did you decide on the percentage exposure to gold and silver?
8. Do you think the 10% or 20% of gold/silver will remain the same in future? How do you plan to address this? Do nothing and leave the fate of your hard-earned money to luck, or rebalance from time to time without worrying about tax?
9. Do you think you will keep holding these metals (or, for that matter, equity) if you get no returns from them for years and years?
10. Be honest. Do you have anything that resembles a plan, or is it just FOMO? Remember, FOMO will only urge you to jump in. It will not help you swim.
In summary, gold/silver in a portfolio is only for investors who have spent enough time studying the risks of holding such metals. And who can handle long periods of poor returns and have the maturity and courage to rebalance their portfolios. If you are planning on “tactical” entry and exit, be warned that no method will work forever. Be ready to make mistakes and cope with losses. If you are okay with all this, you can, as the “experts” say, “have a small exposure to gold/silver for the long term”. But are you truly ready to appreciate risks and buy these metals? Most people are not. That is the problem with FOMO.
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