Posted on January 19, 2023
When I first set out on building a portfolio of precious metals, I really didn’t have much of a strategy. I had just decided that it was going to be a course of action to incorporate the metals into my financial plans. I really didn’t know where or how I was going to get them or in what quantity. But after losing my job 13 years ago and facing raising a newborn with half of our overall income, it became very apparent that my existing strategy was not working.
After all, I had most of my funds tied up in my real estate investments and my corporate retirement accounts. I could access those funds, but it involved time, a lot of hassle, and loss of value to various fees. I also could only borrow from my 401k up to certain limits. I felt as though I didn’t have full access to my money and didn’t like the terms I had to agree to in order to get it.
I am not suggesting that anyone does the following, after all, I am not your financial advisor. This is a choice I made on my own, and I suggest you speak with your financial advisor before seriously considering doing anything remotely similar.
I liquidated my small pension from my days at E&Y, and my 401k from my corporate employer, and put the money into buckets. The first bucket was 6 months of cash for expenses because that was the average time it took at the height of the financial crisis for a laid-off professional to find a new job. I did find one, but not in my field. I worked for a currency broker and that is where I passed the Series 3 commodities license years ago, although I do not maintain it now as I no longer work in that space.
From there, I began to build a retirement plan out of a combination of real estate and precious metals. Fast forward years later when in 2018 I sold the rest of my rental properties and allocated the funds to cash and precious metals, while paying off any remaining debt I owed. Now I am highly liquid with no debt and very easy access to my funds when I want them, with the upside on the value of precious metals over time. I think we are in a generational bull market and have literally put my money where my mouth is.
I would recommend that most people that are set on purchasing precious metals use an old canon we had in financial services. When adopting a new asset class in your portfolio, start with a 5% or a 10% allocation and see where that takes you. If you are comfortable later, you can increase that allocation as you see fit. Or you can decrease it any time you want. The great thing about metals is they are one of the most easily liquidated investments you can own. Everyone knows them and will quickly offer you fair value for yours, depending on where the market is.
Some people will take a chunk of cash intended for savings and/or retirement and place a one-time order for their precious metals. Typically, this occurs when someone has a life event such as a death in the family or job loss which may require them to move their savings plan away from an old employer or plan and into a new vehicle. But this type of event is fairly rare and does not apply to most people. Most people need a savings plan to contribute to every month, and that is what we talk about here.
Dollar-cost averaging means purchasing something over time at different price points with the purpose of getting the average of those price points as the base cost. For example, you may have purchased silver at $20 and are now looking at $24 price points. If both orders were equal in value, your average price for the metals is $22, which is quite good.
Now, you may fear the prices going back down, but in this type of savings plan, that is a good thing! It lowers your overall cost of acquisition of the metals without forcing you to wait until the lowest possible price. In that scenario, you only do better if you perfectly time the valleys in the market which very few people can do successfully.
If you believe, as I do, that in the long-term precious metals have much more upside then this is the type of plan that can benefit you. You do not have to wait for the metals to hit a specific price point to capitalize on prices. You can purchase whenever you have the funds available and know that your average price will provide good profit margins over time. It reduces the need to watch the daily prices and try to time entry points. Day trading may work for some, but we do not all have the time to be day traders.
This strategy works for everyone alike, but it also has a downside. When the metals prices dip below your average cost of acquisition, then your portfolio is squarely in the loss column. However, if you aren’t in a rush and have some time to hold them, there is no requirement to sell them. Especially if you followed my bucket approach above and have 6 months’ worth of expenses in cash to get you through the lean times, should they come.
Dollar-cost averaging is a great way to scale your way into an investment without taking a tremendous amount of risk upfront. It provides you a way to ‘try out’ an investment and see how it stabilizes your portfolio, which is exactly what gold does. When everything else is selling off, as the rest of the market did in 2022, gold provides that safety and security that also anchors your portfolio in bad times and reduces the damage that other, more volatile assets can introduce to your retirement plans.
Think of gold as your best runner on a track team. That runner is going to generate a certain amount of productivity and points and can carry you on your worst days. That is what gold is – your portfolio anchor that performs when nothing else does. And this method can help you build up your portfolio while you begin to get comfortable with owning more of it. I think that is a winning strategy for most of us.