Gold and other precious metals help you diversify your portfolio and mitigate the impact of risky investments. This precious commodity retains its value and significance for centuries. Therefore, it has become a top pick for many investors.
Gold is relatively stable and is much less volatile than stocks, bonds, and other investments. While it offers less risk, it doesn’t have a high ROI. However, it can ensure your portfolio stays balanced by being the least risky investment you have.
Most people want to know what percentage of their portfolio should they allocate to gold. You might find varying recommendations when investing in gold. For instance, some might suggest dedicating a huge chunk of your portfolio to gold, while some would recommend having minimum gold investments.
To help you out, we will discuss the factors that make gold a popular investment. This way, you'll know how much value gold can add to your portfolio. We will also summarize the recommendations, which can help you better understand how much gold you should have in your portfolio.
Why Should You Invest in Gold?
While you might not hear the same buzz about investing in gold like crypto or the stock market, many investors still prefer this valuable commodity. Gold is an exceptional asset that can retain its value during economic turbulence or recessions.
Investors buy gold to diversify their portfolios since the metal has retained its value for centuries. Therefore, many experts suggest allocating a percentage of your portfolio to gold. However, many people wonder what percentage of their gold they should allocate to gold.
Overall, the consensus is to invest in precious metals, particularly gold, to diversify your portfolio. Let's review the few factors that suggest you should include gold in your investment portfolio.
Protects Against Inflation
Many people tend to invest in gold because it acts as a hedge against inflation. Historical trends show how rising inflation causes gold prices to increase. However, few investors believe there is no significant connection between gold prices and inflation, at least in the short run.
However, we have seen a steady increase in the prices of gold when there is a chance of economic collapse. The Great Recession in 2009 and the covid-19 pandemic are prime examples of how instability can bring a rapid surge in prices for gold. This upward momentum gives people the confidence to invest in gold during economic instability.
However, investors should note that there is no statistical significance in the relationship between inflation and gold. Therefore, don't expect gold prices to rise when inflation increases.
You Can Always Cash Out
Easy liquidation is also a significant reason many investors buy gold. The wider acceptance and ability to exchange cash for gold make it a popular choice for investors Even if gold prices have decreased after your purchase, you can hold them to sell it at a higher price.
Some bonds and investment tools don't allow you to liquidate your assets before a specific period. For instance, your IRA withdrawals before age 59½ would be subject to taxes and penalties. But with physical gold, you won't have to pay fines or taxes.
You can easily take your gold to the closest gold dealer and exchange it for cash. The easy liquidation allows you to rest easy, since you can quickly get cash for your investment. Thus, it makes gold a more attractive investment.
Scarcity
Scarcity refers to a limited supply of an item with high demand. Many authorities believe that most of the gold on the earth is already refined and in circulation, so there isn’t a lot to mint. Therefore, all the gold in the world is already in the market.
Some experts believe that because of scarcity, gold prices will continue to rise. Therefore, financial advisors and experts believe that investing in gold is optimal since it can help you enjoy a decent return in the long run.
Investors buying gold because of its scarcity should remember that mining gold might become unsustainable by 2050. That is when we can expect to see the biggest change in gold prices. So, you would have to consider a long-term investment strategy if you want to benefit from the scarcity of gold.
The minimum time you can plan on keeping gold in your portfolio should be around 25 to 30 years. That is when the scarcity of gold can allow your gold's value to increase.
Intrinsic Value of Gold
Most people invest in gold because it is present in various processes throughout different industries. Besides jewelry, many manufacturers use gold in the production of electronics and heavy machinery.
Also, few people believe gold prices can rise after a complete economic collapse. However, for economic experts, this scenario is implausible. Therefore, it should be the primary reason why you to invest in gold, since there is a rare possibility that this scenario takes shape.
Diversification
Last but not least, many people choose to invest in gold because it diversifies their portfolio. Even if you have made risky investments, gold can help balance out riskier investments in your portfolio.
However, it does not mean that you only include gold in your portfolio. You should also invest in other options such as stocks, ETFs, and mutual funds. You should also conduct extensive research into the asset you want to invest in before committing
Recommendations Vary
You'll see suggestions regarding how much gold you should have in your portfolio. One vital thing to remember is that you shouldn't have a significant portion of your portfolio dedicated to gold. The reason is that gold doesn't offer the same returns in the long run that you can get from other investment tools.
If we look at prices for gold since 1970, we will see an increase of 1.2% yearly when considering inflation. On the other hand, the S&P 500 grew by around 8.1% yearly when considering inflation. These figures show that investing in the stock market can yield better returns than gold.
Nevertheless, the stability that gold offers makes it an excellent safe-haven asset. Stock markets are highly volatile and could wipe out your profits in an instant. However, the gold is much more stable and won't fluctuate as drastically.
But the stock markets offer you a chance to boost your investment through High-Risk, High-Return Theory. In a nutshell, having a low-risk investment such as gold in your portfolio is only good for longevity and balance.
Don’t Make Gold a Significant Investment in Your Portfolio
The recommendations regarding the percentage of your portfolio you should allocate for gold will vary. But, you will find one thing common in all recommendations: don’t have too much gold in your portfolio. If we compare gold's performance with stock and other investments, we will see that gold has barely increased in the long run.
Most financial experts and advisors suggest that your gold investment should make up 6% to 12% of your portfolio. This percentage helps reduce risk and leaves room for other investment options.
Generally, we came up with this percentage after reviewing various recommendations. So, it would help if you performed ample research and then decided on the ideal percentage. Depending on your goals and needs, you can have a lower or higher percentage of gold in your portfolio.
You might also come across expert recommendations where they suggest having nearly 60% of your portfolio in gold. On the other hand, some might even suggest not investing in gold at all. Nevertheless, you need to decide how much risk you want to take after considering everything.
Owning Physical Precious Metals vs. ETFs
Investors today have various options when investing in gold, as they can choose from bars, coins, or bullion. This method gives them easy access to the precious metal of their choice, and they can quickly liquidate it. Also, many believe that possessing gold also gives them more security, and the liquidity factor offers multiple benefits.
On the other hand, people don’t consider storing physical gold personally, since it‘s too risky. There is a possibility of theft, damage, or loss if you keep your gold at home. So, if you want to invest in gold without keeping it in your possession, then you can invest in an ETF or gold exchange-traded fund.
Gold ETFs are corporations that offer you shares on the stock market. These corporations hold a large quantity of physical gold and are responsible for keeping it safe. The increase in the gold's value will automatically reflect on your ETF. Investors who choose this option can get all the benefits of buying physical gold, but trade off the ease of liquidation.
Moreover, you can also open a gold IRA account for your retirement savings. These IRAs offer you the same tax benefits and rewards as traditional IRAs, with the only difference being that they use precious metals instead of cash-backed assets.
The prices will increase over time as more investors get their hands on this commodity. Therefore, you should choose the best option suitable for your needs and requirements.
Start Investing in Gold Today
If you want more information about adding gold to your portfolio, you can check out What is A Gold IRA. You can contact us to learn more about investing in gold to diversify your portfolio.
