Introduction
In today's uncertain economic climate, protecting your hard-earned money is more important than ever. While stocks and bonds offer potential growth, they carry too many risks. Gold, on the other hand, has withstood the test of time as a reliable store of value.
Let’s explore how incorporating gold into your investment portfolio can provide you with a solid foundation for your financial future.
What is an investment portfolio?
Before we delve into gold’s role as an asset in your investment portfolio, let’s first understand what it represents.
An investment portfolio, also known as a financial portfolio, is a collection of different assets held by an individual or organization. It can include stocks, bonds, cash, commodities, closed-end funds, exchange-traded funds (ETFs), and cash equivalents, like gold.
The main goal of having such a portfolio is to protect and grow your wealth over time. So, if you want to increase your income or financial nest egg, it’s time to start your very own investment portfolio.
Did you know? The term portfolio comes from the Italian word portafoglio, which refers to a case designed to carry loose papers.
Is it worth having a gold portfolio?
Absolutely! Gold has been a reliable store of value since the days of ancient kings and queens. Even nowadays, its allure as a safe-haven asset remains as strong as ever, making it an excellent addition to your investment portfolio.
Gold’s historical role as a safe-haven asset is complemented by its impressive performance in recent decades. Following the Nixon administration's decision to end the gold standard in 1971, the price of gold skyrocketed, rising from $35.00 to $2,483.35 per ounce by July 2024. This is an impressive compound annual growth rate of 8.37%.
As a result of this and gold’s historical role as a hedge against economic downturns like recessions, wars, and inflation, it has become a sought-after asset for financial portfolios.
In a nutshell, gold is:
- Scarce: Its limited supply makes it a valuable asset.
- Durable: Unlike other precious metals, gold doesn’t corrode or tarnish.
- Universally accepted: Gold is recognized globally as a form of currency.
The role of gold in your investment portfolio
Beyond its aesthetic appeal, gold has proven to be a strategic asset for smart investors, private entities, central banks, and countries in general looking to strengthen their financial portfolios and safeguard their money from economic storms. As a tangible asset with a finite supply, it plays a unique role in your portfolio unlike any other:
Diversification
Diversification is the mantra of any prudent investor. It is the act of spreading your investments across various assets. After all, it’s not a good idea to have all your eggs in one basket. So, having a diversified portfolio helps protect you from stock market volatility and minimizes risk.
Gold has a low correlation with other types of assets, like stocks and bonds. So, while stocks often tumble, gold doesn’t, providing you with the perfect safety net. In fact, gold typically moves inversely to stocks, making it a valuable hedge against market downturns. That’s why it is a must-have in your portfolio and makes an excellent diversification asset.
Additionally, gold can help balance your portfolio’s overall risk profile and protect you from a variety of economic turmoils.
High liquidity
An important part of building a balanced portfolio is ensuring that it has a decent level of liquidity. Liquidity refers to the speed at which an asset can be converted into cash. A highly liquid asset can be sold quickly without significantly impacting its value.
Gold’s liquidity is unparalleled. It is a globally recognized asset that can be swiftly converted into cash without loss of value. Unlike other assets, like real estate, that might require extended selling periods or price reductions, gold holds its value even when sold promptly.
Thanks to its long-standing role as a global currency reserve and its deep-rooted cultural significance, you’ll always be able to sell your gold at a high price.
Hedge against inflation
One of the main reasons to have gold in your investment portfolio is to use it as a hedge against inflation and financial and political turmoil.
Gold has historically served as a reliable protector against inflation. Unlike traditional fiat currencies (cash), which easily lose their value over time due to certain economic factors, gold holds its purchasing power. In other words, when the dollar and the other fiat currencies weaken, gold typically rises.
By buying gold, you add a valuable asset that will preserve your wealth over the long term and save your money from the erosive effects of inflation.
Risk management
Investments are inherently risky. However, incorporating gold into your overall portfolio can help mitigate much of that risk.
Stocks can go up and down like crazy, but gold can help when things get tough. Historically, it is a pretty solid buy and performs great while other asset classes crash. It can balance out your investments, acting like a safety net during hard economic times. For example, during the 2008 financial crisis, while stock markets crashed, gold prices soared.
Pro tip: Gold is your financial safety net. It's insurance for your money against life's unexpected storms.
Maintains value
Investors prefer to invest in gold as it has low volatility.
Volatility is a fancy word for how much an investment's price can jump around. For example, imagine your asset is on a rollercoaster. Sometimes, it may go up really fast, while other times, it drops quickly. That’s a volatile ride.
Stocks and equity funds are like a rollercoaster — constantly going up and down, while gold is often steadier, more like a gentle ride on the way up.
As gold prices are more stable and often increase, this makes gold a great choice for investors looking to protect their money. It’s like having a trusted friend who’s always there for you, even when things get stormy.
Safe-haven asset
Take a look around. The world is full of economic uncertainties and geopolitical tension. Whether it’s the war between Russia and Ukraine, between Israel and Palestine, the tensions between China and Taiwan, or the rising cost-of-living prices, such factors can easily send the financial markets into a frenzy.
On the bright side, gold’s resistance to economic turmoil makes it a reliable store of value. One that will keep your wealth safe over time and even make you a profit. Due to this, it is considered a safe-haven asset.
Did you know? A safe-haven asset is an investment that is expected to hold or increase in value during times of market instability or economic downturns.
How much gold should you have in your portfolio?
You can have as much gold in your portfolio as you want. There isn’t a set limit to how much you can own specifically when it comes to physical gold, like gold coin collections.
Generally, financial experts recommend allocating around 5-35% of your portfolio to this precious metal. This range provides the perfect balance between diversification benefits, inflation protection, and safe-haven appeal.
How to incorporate gold in a portfolio?
Adding gold to your investment mix is a smart move. Plus, it’s super easy as there are many ways you can incorporate gold into your portfolio.
The best possible way is to buy physical gold like rare coins, unlike investing in gold ETFs which are much more compromised than owning physical stock.
That is, investing in physical gold offers you the most benefits. Unlike paper assets or digital holdings, physical gold can’t be manipulated or devalued through electronic means. Plus, having direct ownership of a tangible asset provides you with a sense of control and security over your investment.
Final words
Investing in gold is one of the smartest moves you can make. It’s a strategic decision that can significantly enhance your financial portfolio.
With its unique qualities and historical significance, gold is a must-have in any diversified portfolio. You’ll protect your wealth, diversify your portfolio, and have an effective hedge against inflation.
Ready to make gold a part of your investment portfolio? Explore our beautiful gold coin collection and take your first step toward financial security!
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