This post was written from a long-term investment perspective; we are still expecting a correction into a June low.
Investors need to be both mentally and physically prepared for the next chapter in gold and silver prices. If we’re correct, there will be a record amount of enthusiasm and prices will reach unthinkable levels; fortunes will be made. Sadly, many participants will be sidelined due to a lack of preparation. This post looks at the stumbling blocks that continually trip up investors.
Physical Preparedness
This aspect of precious metal investing is relatively straight forward. You need to have a ticket to get into the show; own physical gold and silver and store it in a safe place. I prefer silver over gold, but it may be more efficient for well-funded investors to own pounds of gold as opposed to tons of silver. If you choose ETF’s or mining stocks for trading, consider owning some physical metal as an insurance policy.
Mental Readiness
Several dangers face both seasoned, and novice investors as they encounter a strongly trending market. Almost all are a derivative of our flawed emotions and seemingly difficult to avoid; this is where experience becomes priceless. Below are simple mistakes investors make while investing.
Overleveraging: Strategic amounts of leverage in a strong trend can add to returns, but unfortunately this tactic is overused. Novice investors are drawn to double and triple leveraged ETF’s like senior citizens to a casino. They dream of the money they’ll have and lose sleep when the market turns against them. If a trading position causes anxiety, restlessness, and an upset stomach you’re unquestionably over-committed.
Cognitive Errors: There are two types of prejudice that limit success, conservatism, and a confirmation bias.
Conservatism: Is the tendency to give too little weight to new information. People fail to modify their prior beliefs as much as the new information would warrant. Prior beliefs tend to be conserved. Because of this, investors tend to underreact to new information that is relevant.
Confirmation Bias: This causes people to accept evidence that is consistent with a prior belief and reject or give little credence to evidence that contradicts it. Thus, when investors hold an existing view, and new information arrives that confirms their beliefs, they tend to give it more weight than it deserves. Conversely, when new data arrives that contradicts their beliefs, they tend to treat it skeptically and underreact.
(Source, Market T. CMT Level II: Theory and Analysis, 2nd Edition. John Wiley & Sons P&T, 42339. VitalBook file.)
Over Trading: Everyone dreams of selling at a top and then buying again at lower prices. However, doing this with any level of consistency is improbable. The coming gold price mania will see incredible price swings. If you try selling at a short-term top, you could get left behind as prices move higher without you. If you must trade in and out, consider keeping a core position that you won’t sell until the final top.
Analysis Paralysis: Paying too much attention to stock charts and market experts confuses more than anything. Opinions vary, and well-respected experts often contradict one another, this can leave you numb and unable to act. It’s common to jump from one market professional to the next seeking the perfect pill but be careful not to overanalyze.
Reducing Noise: Watching every market move throughout the day will drive you crazy and frequently leads to timing errors. Do your best to approach the data calmly and check prices less often, maybe once or twice a day. If you find yourself panicking you’re likely overleveraged and should reduce your exposure.
Conclusion
If you avoid these common mistakes, you could dramatically improve your financial well-being over the next 5+ years. Have a core position in physical metals and don’t sell it until the bitter end and please avoid over-leveraging.