gold

Silver and Gold are Pretty and Shiny, But is the Allure Driven by Fear in the Economy or a Sound Investment Decision?

I have been researching and reading and researching some more on the commodity market and I have no idea what to do. I admit that I am a novice at investing. However I do not deny that it will be an essential component in my journey to financial freedom. My experience investing consists of this: I got burned in 2000 when I invested in a four star mutual fund, thought that I didn’t need to watch it, then it tanked with the rest of the stock market. Beyond that, I tried day trading a few individual stocks and felt like I was uneducated and gambling rather than making sound investment choices. My main problem is, right now I just don’t know exactly where to begin on my limited funds. I have read contradictory things, and still have a lot of financial lingo to learn.

The Gist of the Typical Advice in Many Personal Finance Books and Blogs:

Save for an emergency/contingency fund (Various advise between 3 – 8 months expenses… That’s a lot of money sitting there not earning anything!)
Max out investing in your company’s 401K, or at least enough for the company match (Diversification choices of a mutual fund or another mutual fund)
Next make sure you have a Roth IRA (Roth’s are great for the young investor because when you take your money out way down the line, your earnings are not taxed)
Then beyond that, there is a lot of debate what to invest in next
Most financial gurus suggest your best investment is in your financial and occupational education (That’s what I’m focused on)

I am happy to have some liquid funds saved aside for contingency funds. I do invest for my company’s 401 K match, but I am not happy with the selection of funds available, it is too limited. Also, I hear over and over again that Mutual Funds take too much out in fees, and over 70% of mutual funds under perform against the S&P 500 Index Fund. I have monitored the trend of my 401k funds against the NASDAQ and the S&P 500 and it is true, they vastly under perform. So, needless to say, I am disillusioned with my 401K as a sound investment (not to mention) retirement vehicle.

So Where Do Commodities Fit Into the Mix?

First off, do not consider investing in silver, gold, platinum, oil, etc without doing a lot of research first. There are a lot of people out there trying to scam people in this market. This is why I haven’t invested in it yet, because I am very cautious and skeptical with my money. You work hard for your money, don’t let it go with out a lot of research.

Here are some pros and cons that I’ve gathered to the choice of investing in silver, gold and other commodities.

Pros:

They can serve as a hedge against inflation (many predict inflation to increase, investors will flee to commodities and the US dollar value will continue to decrease)
They can be a good investment choice for diversification if you have most of your investments in paper assets (Funds, Bonds, Stocks)
If you have the physical commodities, you do not have to worry about paying taxes on selling them them (Interesting fact!)

Cons:

You pay a high tax rate on them if you have owned them less than a year (28%) in ETFs and withdraw (this can be avoided through holding shares in a Roth IRA fund)
If you have large quantities of the physical commodities, they can get expensive to secure and protect
The 5 year market trend for most of these is rather volatile (ie, they still carry risk), though seemingly on an upward curve the past year, the 5 year trend is still quite volatile for many commodities
Often the price of entry to gold, platinum, etc is rather high. (You can go buy a few silver coins, but that doesn’t seem like a true investment to me, just something to add to your coin collection)

For a thoughtful approach to reviewing the balance between commodities, the dollar and inflation , consider reading this post by Dream Manifesto.com on Is Our Monetary System Near a Singularity?