Silver (SLV) Selloff Highlights Dangers in Following the Herd when Investing
If you’ve been watching market trends closely over the past few years, you’ve seen the value of gold and silver, and their respective popular ETF’s GLD and SLV, skyrocket as the value of the U.S. dollar has shrank.
As is often the case, bubbles are made to burst (and they always do).
The rise and fall in the price of silver presents an excellent learning opportunity for all investors.
The Silver Price Rise
Silver (SLV) peaked at 48.35 on April 28th, it’s highest price in decades, after a meteoric 500%+ increase since late 2008.
Here’s a look at SLV’s price chart over the last few years:
At one point or another a little voice in my head and many others watched this rise and kept saying “You have to get in now, this is a golden opportunity!”.
The Silver Sell-Off
As is often the case when the speculation herd jumps on the bandwagon and drives prices upwards, they are bound to come crashing back down to reality.
The silver sell-off was triggered through a combination of profit-taking, the herd heading for the exits, the Comex raising contract prices, and the renewed strength of the U.S. dollar, on the heels of Osama Bin Laden’s death.
The result was an astounding drop of over 31% in a little over a week:
What Can the Drop in Silver Teach Amateur Investors?
This big one-week drop is similar to others that play out in the market time and time again. And it teaches some important lessons:
- Herd Mentality: When everyone else is piling in and results seem too good to be true, that’s when it is time to get out or avoid getting in to a particular investment.
- Nothing Lasts Forever in Investing: All good things do come to an end. Witness real estate’s decades-long rise as evidence.
- Diversify, Diversify, Diversify: Had you had a huge investment in silver, you would have lost over 30% in one week, and if you piled in late, you’re probably in the hole in a big way. Going so heavy in one company stock or one commodity can leave you open to a lot of risk. That’s why passive index investing, which offers diversification through investing in entire indexes, is so appealing. Sure, you miss out on some meteoric rises like SLV had, but you also miss out on meteoric declines and usually win out in the long run.
Have you ever been burned by joining the party late?