How Gold Can Stabilize Your Investment Portfolio

People define the concept of a “richer life” differently. Some might describe it as having substantial retirement savings in the bank, while others may refer to the stage where they’re finally free from debt. Others may also see it as having a rewarding job that can pay their bills without borrowing from friends. 

No matter the definition you choose, you might not be able to attain the level of affluence you desire without discipline and careful planning. 

Wealth creation and retention require discipline, consistency, and a strong desire to do better. Most times, wealth directly results from the amount of value you create and your ability to convert that value into lasting wealth. 

In this article, we’ll discuss the significant role that precious metals, especially gold, played in wealth creation and the overall economy of many great nations before the advent of paper money. We’ll also look at why gold is still relevant for wealth creation in the modern world and how it can stabilize your investment portfolio. 

Stabilizing Your Finances 

When the financial market experiences a lousy turn, several investments suffer, and many investors struggle to get back on track when the market stabilizes. Investors who diversify their investment portfolios stand a greater chance at quicker recovery from an awry financial crisis than those who don’t.

Portfolio investment diversification prevents you from going broke by losing all your investment in a negative market swing. Before attempting to diversify, it is crucial to know the types of assets to buy and how much money to invest in each purchase.

Diversifying your portfolio with highly volatile assets can only be a good thing for short-term investors. Hence, you need to include more stable investment options in your portfolio if you intend to build real steady wealth. No other commodity provides a haven for financial security than gold.

Stabilizing Your Portfolio with Gold

It’s no news that gold has significantly impacted several countries’ economies in the time past. 

Because of the introduction of paper currency, many have argued that it no longer holds monetary value like before. Nevertheless, the truth remains that gold has some unique attribute that makes it a valuable asset for investors to add to their portfolios.

Gold can stabilize your portfolio through the following strategic ways:

Generating long-term returns: Gold is a highly advantageous asset generating positive returns during periods of uncertainty. The price of gold has stood at a steady 10% average increase since the collapse of the gold standard in 1971.

Gold has also successfully prevented investors from inflation for over 49 years now. Oxford Economics also opined that gold maintains its stability during periods of deflation as well. 

These periods often come with financial stress, low interest rates, and reduced investment and consumption. Gold also has a history of outperforming all major currencies as a legal tender.

Providing low to no-risk liquidity: Gold has a highly liquid, global, and large market. It is more fluid than most financial markets, including Dow Jones Industrial Average, euro/Yen, and German Bunds.

The Gold market’s depth suggests that it can easily accommodate buy-and-hold investors. Its liquidity also remains intact even during periods of acute economic stress.

Reduces losses during economic downturns: By diversifying your portfolio with gold, you have a lesser risk of losing all your hard-earned wealth during financial distress. Gold delivers positive returns and allows investors to fulfill their expenses when it’s difficult selling other assets in the portfolio.

Improves portfolio’s overall performance: For an investment portfolio to boast all-around positive performance, it needs to benefit from positive long-term returns, adequate diversification, and liquidity. Since gold has all these features, it is an excellent addition to enhancing your investment portfolio’s risk-adjusted returns.

How Much Gold Investment Should You Hold in Your Portfolio?

Before allocating percentages to the assets in your portfolio, you first need to design your portfolio in a way that agrees with your long-term financial targets. 

It is common to see experts suggesting that you limit your gold investments to 10-15% of your portfolio, but there are several factors to consider before deciding.  Some of these factors include:

  • Financial goals: Your long-term financial goal should be a key determinant of how much of your portfolio you’ll invest in gold. Gold functions better as a portfolio diversifier than a short-term high return investment; hence, it is more suitable for conservative investors. 
  • Gold price in comparison to other investments: The price of gold and other assets may not be constant year after year, which is why you need to rebalance your portfolio. You can increase the gold allocation in your portfolio as the need arises.

Generally, the amount of gold allocation in your portfolio can be any of the following:

5 – 10%: This option for investors who are confident that their country’s economic growth is unlikely to experience a drastic downturn 

15 – 25%: suits investors who consider the financial situation in their country as moderate to high-risk

30 – 50%: if you’re positive that your country’s economy has reached a high-risk level and will cause a financial crisis, you should consider allocating up to half of your investment portfolio to gold.