There is so much talk about diversification when it comes to investment. But the truth is this: diversification connotes intelligent investing. It reduces the long-term risks of investing and allows you to gain high returns through other stable alternatives.
You can diversify your portfolio by investing in different markets and assets, including ETFs, stocks, mutual funds, bonds, and precious metals like gold. However, you may have discovered that most financial advisors hardly mention gold when discussing investment assets. Even the few that do usually advise investors to hold about 4 to 5 percent of their portfolio in gold.
Although some people are biased about gold investments, they offer a lot of benefits. In this article, I will expose those benefits as well as show you how to diversify your retirement portfolio with gold.
What is Portfolio Diversification?
Portfolio diversification is a strategy that investors use to manage their investments so they can attain their financial goals in the long run. A portfolio that is properly diversified offers huge potentials of high returns without exposing you to excess risks. Diversification isn’t limited to only a class of security or investment type; it extends to individual security classes.
You should invest in various industries, tenures, and interest plans. For example, it is not advisable to invest all your funds in the health sector even though it is among the thriving sectors in the heat of the COVID pandemic. You can invest in other upcoming sectors like information technology or education technology.
Portfolio diversification promises huge profits and prevents losses. However, fund managers, personal investors, and financial planners utilize it as a tool for creating balance. And an effective method of diversifying your portfolio is through a gold investment.
Why Should You Invest in Gold?
Here are some reasons for investing in gold:
I mentioned earlier that the goal of diversification is to create balance; gold makes it possible. This is because it is an uncorrelated asset that has no relationship with stocks. Also, gold protects wealth, enhances returns, and reduces volatility.
Traditionally, people view gold as a secure investment whose value increases in times of political instability or geopolitical crisis. Gold is money that can’t be debased or printed. Hence, it protects owners from all negative outcomes that are associated with paper or fiat currencies such as devaluation.
Gold serves as a hedge against inflation because its spot price increases during such periods. Also, as the prices of consumer goods increase, gold’s price increases too. So, if you already hold gold, your purchasing power would be protected.
Expert Tips for Investing in Gold for Portfolio Diversification
There are different ways to invest in gold. Each method has benefits and drawbacks, so ensure you consult a professional before you invest.
1. Purchase the Physical Gold
You can purchase physical gold in various forms such as gold bars, bullion, coins, and jewelry. Each form has advantages and disadvantages. However, you should consider the cost of obtaining them. This will serve as a yardstick for your purchase.
Holding physical gold gives you complete control over your asset. If a war breaks out, you can easily take your asset and move to another country. But someone can steal your gold if you keep it at home. To prevent this kind of situation, you need to rent a safe in a bank, but be prepared to pay the fees that accompany this option.
Additionally, you can open a gold IRA. It is a retirement account that allows you to invest in physical gold. Your assets would be stored in a depository that is approved by the IRS. This option is safer than keeping gold at home and does not attract penalties unless you withdraw before your retirement age. You can request a free kit to help you understand how a gold IRA works.
2. Gold Exchange-Traded Funds (ETFs)
If you do not want to go through the stress of finding a reliable gold dealer, you can own physical gold by buying from an ETF. Exchange-traded funds buy as well as store gold for investors. Since the ETF holds the gold, it tracks current gold values.
This method is beneficial as you do not need to bother about insuring and storing physical gold. It allows you to purchase or sell your ETF shares whenever you desire. And you do not need to scout for buyers like in the case of physical gold.
Although ETF is convenient, it does not come on a gold platter. Because the ETF purchases, stores, and protects your asset, it will reflect in the total cost of gold ownership.
3. Stocks of Gold Mining Companies
If you prefer investing in companies that produce gold instead of the physical asset, then you should consider buying stocks from gold mining companies. This method allows you to own a share of the company’s profit. If the company grows or makes profits above gold’s spot price, you will benefit from the increase.
Although owning this type of stock sounds interesting, it is risky. The company may be unable to mine a sufficient quantity of gold that will yield your projected return on investment. Also, the company might be mismanaged leading to underproduction and low profits.
Mining companies focus on different metals instead of only gold. While you will enjoy exposure to other assets, it can impact the company’s returns unlike when they focus on gold.
There are other ways to invest in gold. You can visit this website to learn more.
You are the only person that can decide how you want to invest in gold. But make sure you understand the factors and risks involved. This involves how much tax you will pay when you want to convert your assets to cash.
Additionally, you need to find out the things that can increase or reduce the value of your assets, including how much that value might change in the future. If you are uncertain about the next steps, consider contacting a financial advisor to examine your unique financial situation. This way, you will get professional advice on the investment method that can help you diversify your portfolio with gold.