Smart investors plan for the crash. There is no such thing as endless growth; crashes and corrections are built-in parts of the economic system. As an investor, you need to embrace this fact and build a portfolio that’s flexible. You can’t predict when the markets will correct, but market corrections are predictable.
To have a diversified portfolio, some of your investments need to be outside of equities, and gold is one of the top choices. Here’s how gold fares against some of the other most popular options.
Gold vs. Cash
When there are high risks and little growth opportunities, sometimes it’s better to sit on your cash. There are good reasons to have some cash in your portfolio, such as an emergency fund, money markets, or a safe haven currency. But gold is better than a savings account when it comes to returns.
Safe havens like the yen, Euro, or U.S. dollar may become targets for investors during tough investment times, but they are all suffer from inflation and lose purchasing power in the long run.
Gold vs. Other Commodities
Commodities cover a broad basket of goods. Everything from livestock to copper to oil is included. The easiest way to invest in commodities is through an ETF or futures contracts, making it possible for individual investors to have a stake in oil, copper, or wheat, without having to own massive industrial warehouses to actually hold them. However, ETFs will chip away at your funds through management fees.
By comparison, gold is easy to store as a physical asset. With a single ounce costing over $1,300 right now, you can contain over $10,000 in wealth in a small stack of gold coins.
As a general rule, all commodities work as an effective hedge against stocks, as investment in crops, metals, and energy is negatively correlated with equities. Commodities help you diversify your assets to mitigate losses; the gains you see in commodities while stocks do poorly mean you won’t feel the full brunt of a market correction the way your over-exposed peers will. Gold is simply one of the easiest and most cost-effective commodities to store as a physical asset.
It’s also easy to buy gold online without too much hassle. There are plenty of companies today where you can find gold coins, bars, and rounds that will deliver directly to your home or provide low-cost allocated storage.
Gold vs. Bonds
You know you need to diversify your portfolio with low-risk alternatives, but why choose gold over something simple like treasury bonds? The biggest reason investors choose treasury bonds is that they are low-risk, guaranteed interest-earners. Gold also comes with low risk for the same long-term timeframes bonds are treated in, but doesn’t get any of the benefits of compound interest.
The time to choose bullion instead of interest-generating bonds is when real interest rates (the interest rate minus the rate of inflation) are slim or negative. In the United States in 2017, the real interest rate was less than 2%. Slim, but still potentially valuable for bond-holders. In Canada, that figure was a meagre 0.2%, and in the U.K., it was in the negatives at -1.2%. Rising gold prices can easily outpace low real interest rates.
Make sure your portfolio can handle tough markets. It’s always just a matter of time before the next correction.