The most important skill of a successful metals investor is knowledge – knowledge both of himself and of the investments he makes. However bullish you might be on gold and silver, for example, it is a good idea to trim positions on the way up, advises Adrian Day, editor of Global Analyst.
“Know thyself” is the inscription above the Temple of Apollo at Delphi. This is most important to the investor (as to the actor in all of life’s endeavours). With investing, the most critical self-knowledge concerns one’s tolerance of risk and volatility.
SPDR Gold Shares (GLD)
Most investors will say, “Oh, I can tolerate risk” – but are less comfortable when stocks they own actually drop sharply. The investor uncomfortable with risk and volatility is far more likely to panic and sell on a sharp drop.
Part of being comfortable with volatility comes by adjusting positions for your financial circumstances and obligations. Part of it is right-sizing investments. Selling on the way up will ensure that your, say, 25% allocation does not grow to a 50% allocation.
At 25%, you might shrug at a 40% decline such as we saw in gold stocks in the four-and-a-half months after the beginning of March. But if it were 50% of your portfolio, you might have a less-calm reaction.
Volatility is not necessarily to be avoided, though. In fact, it is what presents the astute, knowledgeable, and disciplined with opportunities.
Warren Buffett has said that he prefers a lumpy 20 to a flat 10. But you must be aware of your own tolerance for volatility. The investor nervous of volatility who is too exposed will inevitably sell on downward moves, never upward ones.
