How To Manage Your Investing Risk Like A Pro
The price of commodities has been trading near their five year lows for the past few months. Gold, silver, and platinum can be a great way to diversify your portfolio with precious medals. Looking at silver with prices being near multi lows there is low downside in the precious medal but there is a high upside. One of the rules of trading is minimize risk is by investing in assets that have a low downside but a huge upside. After all playing a great defense with your investments can lead to great gains.
Keep in mind, silver miners are among the most volatile securities in the market. They boom and bust like crazy. But after the recent bust, it’s a great time to make a bullish bet.
There are three simple ways to reduce downside risk…
1. Buy a diversified fund like SIL, which holds shares of 23 different mining companies. This removes the risk of shares tanking on one company’s bad news.
2. Use a stop loss. You can sell your shares for a small loss if silver drops below its recent lows.
3. Keep your position size small. This ensures you won’t take a catastrophic loss on your overall portfolio if silver suffers a sharp decline.
These three rules are very important when playing a good defense while investing. Always spread out your risk with small positions (rule 3), diversify where possible (rule 1), and make sure you know when you want to get out of an investment (rule 2). Surprisingly silver is used more in industrial products like solar panels and wires rather than for investment purposes. With a growing use in industry the price of silver is set to increase because of increased demand. This is just another way to look what to consider when investing in commodities. You need to know all the purposes and the market for your investment.
About Shaun Archer Tatum Shaun works in corporate finance in New York City. He has done financial consulting for several start-ups and has worked at several Fortune 500 companies. He has contributed several finance/investing articles on Seeking Alpha which have been published on Yahoo! Finance.