How Gold Diversification Can Benefit Your Portfolio
Gold has long been cherished by human beings for its lustrous appearance as well as its usefulness. To this day it plays a major role in consumer and industrial electronics, jewelry and other adornments, and demand attention in the financial arena. In comparison to other sectors it often outstrips the value and risk analysis of things like stocks, bonds, and even real estate.
Should You Increase The Gold Investment Of Your Portfolio?
Historically speaking, gold has always been a sound investment option to hedge against risk. It typically shows positive growth over the long-term compared to other assets on the stock market. This is especially true in distressed or volatile economic conditions.
It’s ability to help insulate your portfolio often comes at a small cost when the economy is stable and growing. Over the past forty years investors holding gold have experienced slightly lower overall. Yet haven’t been hit as hard when markets got tough.
Being invested in a wide range of assets can potentially reduce your overall risk. This strategy, which is known as diversification serves to reduce your risk losing everything if a single investment collapsed.
These days many financial advisors recommend a healthy blend of investing around 60% in equities with the remaining 40% invested in bonds. Every year or so your advisor might also recommend rebalancing your portfolio to maintain diversity while also optimizing potential gains.
This process often calls for selling a small-to-modest amount of the investments that have been delivering strong returns, and potentially buying more of options that may have experienced a minor loss. Some financial advisors will admonish against buy gold as it is typically considered to be a non-yielding asset that doesn’t provide direct income. However, it’s stable value also means that the value of gold doesn’t behave like fixed-income bond prices or equities.
Gold’s ability to insulate your portfolio is related to several key factors.
Since gold prices don’t fluctuate the same way other assets do it helps reduce potential negative impacts caused of sharp losses that might occur in your portfolio. This can be especially helpful for parking a portion of your investment profits in volatile market conditions.
At the same time, gold prices have a knack for rising faster than they fall. This essentially means that gold has the ability to soften the impact of sharp losses that can occur in other investment areas.
On an international level gold also gold offers superior liquidity. If we translated it into an active form of currency, it would be the fourth largest FX pair in the world.
Gold is always in demand around the world and plays a role in many sectors including technology, jewelry and more. This means that it isn’t going collapse like other investment opportunities have the potential to do.
Gold is also accepted by all fiat currencies for determining its value. This makes it very useful for insulating your risk against a potential currency crisis or sharp increase in inflation.
Gold Helps Lower Risk In A Healthy Portfolio
In general, the more gold you are holding the lower your risk will be. If other assets falter or fail, your rewards can potentially increase as other people seek greater security.
If we look at past economic conditions. An investor with a $1 million portfolio who added 10% gold would have reduced their losses during the worst year of the recession by around $17,000.
If you look at the last forty years a portfolio with 10% gold would have shown compound annual growth of around 9.7%, which is .1 percent, per year below the total annual returns seen in a balanced portfolio holding without any gold in its diversification strategy.
This pattern persists in other international markets. If we look at the United Kingdom a similar pattern appears over the past four decades. In their market gold has served as investment insurance to help hedge UK-based assets.
Ultimately, the first rule of making money is to avoid losing money. Diversifying your portfolio to hold an increased amount of gold increases your chances of being paid better returns. At the same time, you shouldn’t think about this strategy chance as being expensive. With careful timing you can increase in gold without stressing out the rest of your portfolio.