Finance and Stuff

Thoughts on finance and other stuff by Johan Lindén

Tag: risk

Speculative Stocks

Most first-time investors and gamblers seem to focus on high beta stocks or markets, such as oil prospecting companies or the Russian stock market. In the article in the link below there is an explanation why there may be a negative downside to this besides just higher volatility.

[…] People who bet on horse races bet on the long-shot horses more than would be justified by the actual odds of winning (and conversely bet less than they should on the favorite horses). The story generally goes like this: Horse-racing bettors have difficulty evaluating small differences in outcome probabilities, for example the difference between a 1-in-50 odds horse and a 1-in-100 odds horse. That’s a 2% probability of winning versus a 1% probability of winning. This results in a large proportion of bettors placing too high of a bet on the longer odds because the potential winnings appear larger in that case.

The logic behind this behavior is most likely applicable to other markets of uncertainty such as the stock market.

http://isharesblog.com/blog/2012/06/05/a-lesson-in-minimum-volatility-gleaned-at-the-horse-races/

Platinum and Silver vs. Gold

Balancing your portfolio for stability by adding platinum and silver to your investments of precious metals.

Both platinum and silver have a lot of industrial use. Much more so than gold and thus they are more sensitive to the growth of the economy. According to Adrian Ash, head of research at BullionVault.com, industrial use accounted for 11% of total gold demand, but accounted for more than 60% of silver demand worldwide. The whole article can be read on marketwatch.com.

But even if you buy gold as an insurance (read my previous article) you might also add a part of platinum and silver, both which have been lagging gold for the last weeks.

Platinum has almost always been a much more expensive metal than gold, but today it is priced at parity with gold.

Silver had a few extremely strong years and has even been outperforming gold the last years.

gold platinum silver

80% Gold, 10% Silver, 10% Platinum, seems like a reasonable balanced mix of precious metal if are aiming at portfolio stability, rather than risk-taking. So if you want a portfolio total of 20% precious metals you buy a 16% gold, 2% silver, and 2% platinum.

Benefits of adding platinum and silver:

  • Might be better for a long-term investment since it contains metals that are more sensitive to a growing economy. So if gold is underperforming other investments, silver might do better in times of higher economic growth.
  • There is less chance that you buy at the wrong time, since these three commodities vary a lot both from other financial instruments and from each other.
  • The more expensive gold gets the more chance of other precious metals to compete to take a share of its place to store value and for its industrial use.

Drawbacks of adding platinum and silver:

  • Silver has much higher volatility than gold,
  • Silver has a higher correlation (higher beta) to the stock market, which is negative when trying to balance your portfolio to get less risk.
  • Gold has historically been the number one asset to own in the worst financial crises.

Good luck with your investments and trading!
Johan Lindén

WordPress & Content by Johan Lindén