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How to Go Bankrupt With the Safest Investment of All Time

20 June 2011 7 Comments

I’m a huge fan of gold as an asset class. It’s timeless, is a long-term inflation beater, and counter-acts the stock market. When stocks go down over 6-12 months, gold usually goes up because people are fearful and are looking for a safe haven.

In the last few years, plenty of people have jumped onto the gold bandwagon. Unfortunately, some have gotten a little “too” pro gold — to the extent that plenty of people have gone completely bankrupt in the last few years making insane bets and bad calls when it comes to both gold and silver investing.

How to Lose Your Shirt With Metals

A little over a month ago, I read a Facebook comment on an investment related fanpage. An investor claimed that he was levaraged up to his eyeballs in silver because it was going up so fast, and anyone who didn’t do the same was “stupid” and didn’t understand how economics really worked.

Unfortunately, that week silver took a 30% nose-dive, and the investor probably lost his entire portfolio.

Sometimes, it’s easy to think we know that we’ve stumbled across a sure-thing, and then try to do whatever it takes to get as much money as possible out of that sure thing. Sometimes, this cultivates a mentality of greed, and we can forget the entire foundation of healthy investing: a low-leveraged, highly diversified, well balanced portfolio.

That said, here are two sure-fire ways to turn a good investment into a bad one:

  • No Diversity. Putting all of one’s assets into gold and silver bullion is a horrible idea — diversification is always a good investment, even during the middle of a bull market. There are plenty of different types of investments that are great investments besides gold — farmland, energy, websites even, paying off debts, etc. Putting all of one’s investment money toward one investment is an easy way to get wiped out during an unexpected dip. And I’m saying this as someone who has a bunch of gold and silver and think it’s going to go up over the next few years. No more than 30% of one’s portfolio should be put in gold and silver. The rest should be in other investment.
  • Long-Term vs. Short-Term. People often think that because an investment is a great one for the long haul, it must be good for the short haul. This isn’t always true. For example, silver took a 30% plunge a month ago — but I’m still buying silver because I think it’ll hit $50-75 in the next few years. People who used leverage because they thought gold or silver was going up over time got wiped out during the short downward trends and dips. That’s just bad investing.

Gold is Still a Safe Haven

Don’t take me wrong — I’m a huge fan of gold and silver. In healthy doses they can make you’re long-term portfolio much safer, give you financial peace of mind, and allow you to know that if the whole system sinks, you aren’t going to drown. But that doesn’t mean that taking extra risky moves is a good idea — that defeats the entire point of buying gold and silver in the first place.

About the Author: Shaun Connell is the editor of Live Gold Prices, where he blogs about gold and silver prices as well as buying gold.


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