Paul Mladjenovic - Investing in Gold & Silver For Dummies

In other words, if your gross monthly expenses are $3,000, then you should have a minimum of $9,000 (three months’ worth of gross living expenses) to $18,000 (six months’ worth). This is cushion money, or emergency funds.

I’m one of the few certified financial planners (CFP) who recommends to his clients and students that they should have (or start) a part-time, home-based business in their spare time to be diversified in their active wealth-building pursuits. The primary reason is to generate income and be diversified from their job. During the COVID-19 pandemic and government lockdown of 2020, nearly 50 million people lost their jobs between March and June 2020. These are folks who didn’t see this catastrophe only a few months earlier.

My point is that if all your active wealth-building income (100 percent) is coming from a single job, that means you are not diversified.

A home-based business gives you the ability to generate extra income in your spare time. It also means tax benefits and the ability to turbocharge your ability to save and invest for retirement. With your own business, you can qualify to have more generous retirement accounts (such as a SEP-IRA). To get more details about launching a home-based business, check out my book Micro-Entrepreneurship For Dummies (Wiley).

Yes, I realize that some of the preceding points aren’t about gold and silver, but they’re part of a sensible plan with both your passive and active wealth-building, and you can see that gold and silver play a crucial part in the passive wealth-building portion.

Look, many investors and financial advisors are ignoring or avoiding gold and silver, and that will be to their detriment. Educate yourself on the pros and cons of all the major investment categories (covered in Parts 2and 3of this book) so that you know what can work for your financial security and what can’t.

Gold and silver can be useful and versatile components of your overall portfolio, but keep your perspective on them. They’re merely tools for your financial security during a time they’re useful. The time will come again that they won’t shine, but that is on the other side of today’s brewing storms. Meanwhile, discover their benefits and how they can complement today’s (hopefully) weatherproof portfolio.

Chapter 2

IN THIS CHAPTER

Seeing how other investments stack up versus gold and silver

Realizing some major risks of gold and silver

As a certified financial planner (CFP) who teaches and consults on investing, I eat, sleep, and think about diversification all the time (it’s not as fun as it sounds!) because it’s always seen as a positive move for investors. Most financial advisors believe in diversification, but I take it to a level that many don’t. When financial advisors talk about diversification, it’s predominantly about “paper assets” such as stocks, bonds, exchange-traded funds (ETFs), mutual funds, and so on.

Yes, those advisors may also cover “hard assets” such as traditional real estate property and conventional assets such as personal holdings (jewelry, collectibles, and so on), but I’m an advocate for including hard assets such as gold and silver in the investor’s portfolio. And here’s the primary reason why.

Where possible, investors should have a variety of investment vehicles in their portfolio for obvious reasons. Diversification helps minimize risk as well as increase the chances of seeing your overall portfolio grow, and the time has come for investors to diversify with precious metals because the economic and financial environment for precious metals is better than ever. Gold and silver are an important part of your portfolio because they’re the only major assets on the financial landscape without counterparty risk. The bottom line is that gold and silver — hard assets used since the dawn of civilization — offer a unique quality of endurable value that paper assets don’t have.

All paper assets have counterparty risk, so what is it really? Here is the essence of this risk: A paper (or digital) investment asset only has value given the promise or performance of the counterparty involved. If the counterparty fails to perform, it will mean the decline of the value of the asset to the point that the asset can be worthless.

Because each class of paper assets has a different counterparty risk, I flesh out this foundational point in this chapter, and you’ll do an “Ooooh … I see what you mean!” (Flip to Chapter 4for more information on other kinds of investment risks.)

Having all your money in a variety of paper assets may be diversified, and many (most?) financial advisors may be confident that you’re properly diversified, but an issue occurs, which is getting more and more pronounced during the 2020s.

Maybe the best way I can illustrate the problem with having “all your eggs in the paper-asset basket” is to use the old reliable example of the Titanic (don’t roll your eyes!). If you were onboard the Titanic and you owned a luxury compartment at midlevel, a warehousing unit on the bottom level, and a gorgeous unit with a stunning view of the ocean on the top deck, then you’d be “in like flint” versus that schlub who occupies the unit with no view and the size of a phone booth on level 15.

But if the ship sinks, the great equalizer is that both of you lose. With a “100 percent paper-assets boat,” it’d be good to have as part of your setup a “life boat” that doesn’t rely on the sinking ship. It has the power to float no matter what happens to the paper-assets ship.

The year 2020 is a major, consequential year that reminds us that our paper-assets ship is surrounded by icebergs, and a life boat is a huge plus. (“But Paul, what if your life boat hits an iceberg?” Because you ruined my great example, switch that to a helicopter so I can move on. Sheesh!)

In the following sections, I explain the counterparty risk with paper investments and how investing in gold and silver can help balance that risk.

When you buy stock, you’re really buying (or participating in) the performance of a company or, more to the point, a company’s executive management. If the company behaves poorly or in a substandard fashion, then the company won’t succeed. This cuts to the heart of the matter: A successful company is profitable.

Profit is the lifeblood of the company, and I could easily make the case that profit is the lifeblood of a successful economy. Without profit, the company fails. If it continues to lose money, its losses will grow and it will ultimately go out of business and end up in bankruptcy. Given that, the stock will go to zero.