Though it is not always the case, we cannot simply switch to precious metals like silver or gold just because the stock market is not performing well. Precious metal markets, including silver, are influenced by various factors, and it’s essential to be aware of market conditions before making any investment decisions.
While stocks tend to perform well in the long term, they can also experience pullbacks, even major ones, but still offer respectable returns over time. On the other hand, silver has not demonstrated a significant long-term increase in value and is better suited for medium to short-term investment.
Some believe that investing in silver provides greater protection against stock market crashes due to its intrinsic value. However, this is not entirely true, as the crash of 1929-1932 showed that even the stock market experienced a substantial decline in value. Although measures have been taken to prevent such drastic declines, stock indexes can still lose half of their value during pullbacks.
In contrast, silver experiences pullbacks of similar or even greater magnitude more frequently and can be more volatile. Therefore, it is a mistake to assume that silver carries less risk than stocks; in reality, it is considerably riskier. While silver does hold intrinsic value, it is relatively low, and relying on it alone may lead to significant losses that could have been prevented by selling silver earlier.
Managing Risk with Silver and Stocks
The correct approach to managing risk with any investment is to define the desired level of risk and hold the investment as long as it stays within that tolerance. When the predetermined risk level is breached, it’s crucial to liquidate the investment.
In assessing the chances of risk, the volatility of an investment must be taken into account. Silver, being highly volatile, requires careful management. However, if one can effectively handle this increased volatility, it becomes less of a concern.
The same risk management principles can be applied to stock investments, but investing in silver demands more attention to management due to its higher volatility and its tendency to not accumulate significant value over time. Timing silver investments becomes even more critical.
With silver’s principle of reverting to the mean over the long term, it is more likely to result in losses if the price is up. To avoid unfavorable outcomes, effective management is necessary – holding while it’s favorable and exiting when conditions turn unfavorable.
Stocks also revert to the mean in the shorter term, but the overall trend is upward, which allows investors to be less hands-on with their investments. However, managing stock investments may lead to higher returns, while neglecting management could still yield positive but lesser average returns.
On the other hand, if an investment has a negative expectation even with risk management, it doesn’t make sense to invest in it unless the goal is to lose money, which is never the aim in investing.
In summary, managing risk in silver investments requires more attention and discretion compared to investing in stocks. While all investments benefit from skillful management, silver investments demand a higher level of skill to avoid losses. Both types of investments benefit from active management, but silver cannot be approached with the completely hands-off approach that some stock investors may employ.
Comparing Returns with Silver and Stocks
When examining the long-term performance, it is evident that stocks have historically offered much greater potential upside compared to silver or other precious metals. Over extended periods, like 30 years or 100 years, stocks have significantly outperformed silver after adjusting for inflation. Stocks have seen substantial growth, often increasing by multiple times, whereas silver has shown limited or stagnant growth in comparison.
In shorter periods, such as a few years, silver can sometimes outperform stocks, especially during bear markets. For example, during the 10-year period between 1972-1982, when stocks experienced a significant decline, silver’s value tripled. Similarly, during the 2007-2008 financial crisis, both stocks and silver dropped in value, but silver rebounded better in the following years.
Over the last decade or five years, however, stocks have demonstrated much better performance, with gains of about 250% and 20%, respectively, while silver prices have either decreased or experienced minimal growth.
In general, stocks tend to deliver superior returns compared to silver, with a few noteworthy exceptions during specific market conditions. During times when stocks are performing poorly, it might be advisable to consider alternative investments, including precious metals like silver. However, the decision should also take into account how well silver is performing during that specific period.
Timing Silver and Stock Investments
One significant distinction between silver and stocks is the speed at which their prices advance and decline. Silver tends to experience more frequent and larger spikes in price compared to stocks, especially during periods of significant price increases. However, these spikes can also be followed by violent reversals, leading to rapid declines.
Due to this high volatility, silver investors need to be nimble and actively manage their investments. Missing out on the swift movements in silver’s price can lead to missed opportunities for significant gains. While capturing such quick moves may not always be easy, not attempting to do so means missing out entirely.
Before the emergence of cryptocurrencies, silver was considered one of the most volatile investments available. Although cryptocurrencies have now taken volatility to a whole new level, silver remains highly volatile in comparison to stocks.
Volatility introduces both higher potential returns and higher risk, necessitating greater skill in managing investments. Knowing when to enter and exit silver positions becomes crucial. Randomly entering and exiting at arbitrary points in time is unlikely to yield positive results or generate substantial profits.
Historically, the expected return of a random silver investment has merely covered inflation. Investing in high-quality bonds, considered risk-free, can offer a similar expectation without the added risk of silver investing.
Physical silver may not always be the most optimal way to invest in silver due to its high costs and spreads. Instead, trading in silver-based securities, such as silver ETFs, can offer more opportunities, especially when betting on the price of silver moving both up and down.
Proper guidance and timing are essential in silver investments. While expertise and skill can lead to better outcomes, even a modest level of skill, exercised at the right time, can be beneficial.
During a bull market, investing in stocks generally outperforms silver, even if silver is also advancing. Stocks tend to offer a more favorable risk-reward profile during such periods. However, in bear markets or when stocks are not performing well, silver can be advantageous in skilled hands, especially when it is rising while stocks are declining.
Differentiating between bear and bull markets doesn’t necessarily require a crystal ball or sophisticated technology. Basic analysis and observation can often suffice. When stocks are in a bear market and silver is in a bull market, it is wise to favor the performing asset, which can be determined with a quick assessment.
