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Silver (SLV) Selloff Highlights Dangers in Following the Herd when Investing

Last updated by on 9 Comments

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:

SLV

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:

Silver_ETF

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?

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9 Comments »
  • Stephanie H says:

    I’ve definitely been burned by trying to time the market and following the herd. I first got into investing in August 2008… My father and others convinced me that it was the perfect time to buy some historically low stocks, particularly in the financial sector. I chose to invest in a trustworthy bank that was doing particularly poorly: Washington Mutual. Needless to say, I lost everything when the bank dissolved. It was an expensive but extremely valuable lesson in diversifying and not trying to time my investments.

    • G.E. Miller says:

      I remember watching WaMu when it was that low thinking it might be an excellent buying opportunity at that price….. however we all saw what happened next. There’s a real fine line between excellent buying opportunity and out of business from the eye of the investor.

  • CME raising the margin requirements was a disaster for silver. Traders really only had two options: 1) put more equity into their account or 2)sell off enough contracts to be in line with the new requirements. Clearly, the traders went with option 2!

  • Dave says:

    I’ve owned commodities (including silver, gold and oil) for years. It’s part of my diversified portfolio. The key is to maintain a reasonable allocation. When metals gain and are too large a % of my assets, I sell.

    That strategy has worked well for many years and takes the emotional side out of investing.

  • MikeA says:

    I love that the auto-advertisement I saw attached to this post was “BUY GOLD!”

  • Natalie says:

    Funny, my thought was sell, sell, sell. I have a bunch of silver wire and such from a jewelry business I ran years ago. I’ve been selling it off over the last couple of weeks. It’s been enough to pay for my vacation this year. Whoopie!

  • Ben says:

    Great article. That “herd mentality” you mentioned was even more apparent during LNKD’s IPO. I’d imagine that stock will have the same fate!

    • Rarig Ross says:

      Ben,

      Based on LNKD’s price to earnings ratio alone it looks majorly inflated. Sheep aren’t just herding here, they are eating each others excrement and in this case of guidance by looking at their ‘goals’ and ‘revenue’ it’s not any good indicator of a safe investment.

      52 week 155.00 – 257.56
      P/E 877.00
      Inst. own 76%

      Yuck. Wait for the dust to clear. I’m curious to know that the company plans to do with their 76%. Any one here own LNKD stock? Feedback?

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