Silver Plays a Small but Vital Role in Every Portfolio

By Jared Dillian

Portfolio strategies like Modern Portfolio Theory and others tend to assume that market returns follow a normal distribution.

Not really.

Certain securities have high kurtosis. That is where out-of-the ordinary returns (larger or smaller) occur more frequently than the normal distribution predicts.

Of course, nobody who is stable and balanced puts 100% of their assets into something which has the possibility of extreme returns.

But risk 90 cents for the possibility of making 10 bucks? All day long.

That’s why here I’ll talk about investing in… silver.

Silver’s Role in the Portfolio

Nobody actually “invests” in silver. I am a silver investor and I wouldn’t say that I “invest” in it. I keep it around for when something crazy happens.

Here is a chart of silver going back a long time so you can see what I mean:

You can see “Silver Thursday” in March 1980, the result of Bunker Hunt attempting to corner the silver market. And you can see the freak-out in 2011.

So you might come to the conclusion that an asset that goes bananas every once in a while could be a good asset to hold.

Especially in light of what is going on in the world at the same time:

I recently talked about the 35/55/3/3/4 portfolio: 35 percent stocks, 55 percent bonds, 3 percent commodities, 3 percent gold, and 4 percent REITs (Real Estate Investment Trusts).

That portfolio gives you almost the return of the 80 percent stocks/20 percent bonds portfolio with about half the risk.

I think if you threw 1 percent silver in there, the risk characteristics get even better.

Sadly, people get a little carried away with silver, like they did a few years back. They start ordering monster boxes of coins and getting them delivered to their front door by very unhappy FedEx guys.

Silver Might Be Worth a Lot One Day

Industrial use of silver went way down after the demise of film photography. Investment demand has also pretty much dwindled to nothing. The fundamental picture is not great.

Still, you never know. Strange things can and do happen with precious metals. Palladium has gone nuts, and platinum is a fraction of what it once was.

And as I said earlier, market returns don’t follow a normal distribution. Extremely positive (and negative) returns happen much more often than a normal distribution expects them to.

Silver looks relatively cheap. It’s about where it was in 2010, when the breakout occurred. It has done the round trip.

But that’s not why I own it, because of some subjective opinion of cheapness. We want to own it for what it does to your portfolio.

Some people like to trade silver in the futures market, which seems insane to me. Silver is notoriously difficult to trade in the short-term. It has earned the reputation of being the “rich man’s casino.” Pass.

Nobody should be trying to scalp a couple of percent out of a silver ETF. You buy it and hold it and wait for it to go 5x or 10x. And then—you actually have to sell it.

Silver miners are also a possibility. Since the bear market, many miners have become small cap stocks that are not very liquid. But they possess the same kind of periodic moonshot potential (kurtosis) that spot silver does.

But you have to be careful with miners. Do your homework.

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