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 |
|---|---|---|---|
| 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 |