The Worst Mistake that a Trader Can Make: Average Down

If I’m forced to select only one thing about stock trading to tell you, this is it: do NOT average down. This is not to say that averaging your cost basis on the way down never works. But more often than not, averaging down is a bad decision on top of a wrong one already.

Inflation: A Reason for (Not) Investing in Bonds

Most people invest in bonds because they want to have stable fixed income. Because the performance of bonds are very stable, they also serve to reduce the volatility of the overall portfolio. Depending on the weighting from 0% to 100%, you can reduce your stock volatility correspondingly. With regular re-balancing between your stocks and bonds, you should be able to “sell high and buy low” in your stock portfolio, and use your bonds as a stable source of income.

Everything sounds good so far, but the most attractive feature of fixed income is also its greatest drawback — the income is FIXED. It does NOT increase as time goes on, and inflation keeps reducing your principle and interests into nothingness. Since inflation is almost always there, you’ve got a real problem especially when you’re investing long term in long term bonds.

Reasons for Investing in Gold & Silver

Gold & silver, or precious metals (PM) as they are referred to in the investing community, are a kind of commodity. Physical commodity investing is not usually done as a long term investment. This is because a commodity has no value besides its intrinsic value. It will never increase in quantity nor quality as an investment or product, unlike stock ownership in a company where the corporate earnings can potentially increase with time.

So why am I investing in such stupid and “boring” investments? Because, on an inflation-adjusted basis, gold needs to exceed $2090 in 2006 dollar to overcome its 1980 peak.

Basics of Precious and Base Metals Investing

There are two types of metals for investment: precious metals as opposed to base metals. Precious metals include gold, silver, platinum, and some other less known materials such as ruthenium, rhodium, palladium, osmium, and iridium. Base and/or industrial metals include copper, nickel, aluminum, zinc, lead, and iron/steel. The reasons for investing in precious metals and base metals can be very different. But their prices are correlated nevertheless because of inflation.

Here are some ways to invest in metals: