Precious Metals

How Much of Your Portfolio Should You Invest in Gold?6 min read

Oct 28, 2021 5 min
Gold Portfolio
Reading Time: 5 minutes

Designing a rock-solid investment portfolio means designing a diversified set of investments and securities that you prefer. This portfolio was ultimately planned to risk the minimum amount of money while generating the greatest level of returns.

Reaching portfolio diversification is something that investors attempt to achieve at every turn because it protects their overall wealth. The wide majority of expert investors recommend spreading your risk through a variety of asset classes including real estate, gold, stocks, and bonds to reach the optimum amount of diversification possible.

Even better, they recommend having diversity within each asset class because this will prevent being too heavily invested in one area or sector. The ultimate idea is to have less exposure to one economic sector. And since diversification is a way to reduce overall risk, there is definitely another thing to consider which is over diversification.

Right now, I’d like to talk about investing in gold. And I’d also like to determine the best amount of gold that you should add to your portfolio.

The Gold Asset Class

People have been investing in gold for many centuries now. Buying this physical commodity is also very popular and many people do it in the form of purchasing bars, coins, and jewelry. Today, it’s even easier to gain exposure to gold through digital assets including gold ETFs, gold funds, and gold stocks to name a few of the most popular options.

gold bar

For the most part, when an economic downturn hits the economy and inflation begins rearing its ugly head, the available money and buying power is typically reduced.

Guess what? This is a good thing for those deeply invested in gold. When the value of money reduces, the price of gold and its overall value start to increase.

What does this mean for investors? It means that if you invest in gold, it’s an excellent way to hedge your bets against inflation. It’s also a great way to hedge your bets against currency volatility as well. Because when the value of the US dollar diminishes, the value of gold tends to rise concurrently.

Investing in this asset class is one of the best ways to add additional diversity to your portfolio. And it will even potentially protect your wealth from a stock market crash, because the price of gold increased dramatically after the 2008 crash while stocks continued to suffer.

An Example of the Benefits of Investing in Gold

Is gold really a great asset to own? Well, let’s let the numbers speak for themselves.

Over the last 50 years, the value of gold has increased on average by 10% per year since 1971. Let me say that again. And I’ll put it in another way. If you were ever interested in an investment that consistently makes 10% per year, you’d definitely want to invest in gold.

As an example, let’s say that you decided to buy $10,000 worth of gold in 1971. Do you know how much money this investment would be worth right now? It would be worth more than $1.1 million, which may seem impossible but it’s the honest truth.

Even better, there are different times when the value of gold temporarily skyrockets before it pulls back to a higher but lesser level. From 2009 to 2012, the value of gold rose by more than $1000 per ounce before it eventually pulled back to a lower amount.

It’s difficult to time the market to say the least. The good thing is that you don’t have to time the market at all if you’re willing to buy and hold. Because on average, you can consistently make around 10% a year on your investment if you’re willing to show a little bit of patience.

How Much Should I Invest in Gold in My Portfolio?

First of all, it’s best to create an overall investment portfolio that’s going to help you reach your long-term objectives from a financial perspective. So, you have to develop a plan for your finances that will give you the best opportunity to reach your financial goals on a particular investment horizon. And you must take into consideration your risk tolerance and the total composition of your current portfolio.

investing

Many experts will tell you that you should keep your gold investment limited to about 10%-15% of your overall portfolio. But this might not make the most sense to you because everyone has specific objectives that they’re attempting to achieve.

But there’s one clear thing to consider no matter who is providing investment advice. Many equities and even term deposits have provided better returns than gold on a consistent basis. But many people like to invest in gold because it’s an incredible hedge against inflation and other assets, so it definitely has its benefits as you have undoubtedly learned.

Below, please pay attention to the three portfolio allocation guidelines that I’d like to share with you regarding gold. They include:

Allocating 5%-10% of Your Portfolio

If you’re confident that the United States and other countries will continue experiencing positive economic growth, then you may only want a small gold insurance policy. In this case, I only recommend investing 5% to 10% of your total portfolio into gold securities and other gold related investments including a gold IRA.

Allocating 15%-25% of Your Portfolio

For the most part, investors tend to remain somewhat skeptical about the overall economic outlook in the United States and other parts of the world. If you feel this way like many other investors, it might be wise to consider allocating an even bigger portion of your overall portfolio to gold securities and other gold related investments including bars, coins, and rounds within an IRA account.

Do you think inflation is going to continue to rise for the time being? Or are you worried about the overall economic picture in the US? If you answered yes to either of these questions, then you should consider allocating 15%-25% of your total portfolio to gold investing in all of its forms.

Allocating 30%-50% of Your Portfolio

Investors who feel the economy is heading in the wrong direction should spend a bigger chunk of their overall portfolio on gold and gold related investments. If this is the case for you, you should invest 30%-50% of your total portfolio into gold related assets and reap even bigger rewards in the event that something extremely negative were to happen.

Final Thoughts

Please keep in mind that you should always keep your total investment strategy and financial goals at the front of your mind at all times. At certain times, gold is going to be a very lucrative and worthwhile investment. At other times, it would make more sense to keep the bulk of your money in stocks, bonds, and other funds. Pay attention to the opportunities and remember to keep your risk/reward balance in check and please rebalance your portfolio over time as well.

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