What Percentage of My Retirement Portfolio Should Be Allocated Gold?

There’s a lot of uncertainty in the financial world right now. The lingering effects of COVID continue to impact supply chains vital to virtually every industry and send ripples through the labor market in many vital sectors. Many financial analysts and social media commentators are predicting all sorts of big financial changes in the near future, causing many to rethink their investment portfolios.

Why Gold Is Important

For years, professional financial advisors have recommended putting 5%-15% of your retirement portfolio into gold. The precious metal is meant to serve as a sort of insurance against tumultuous markets. With gold, the conventional wisdom is that when the market goes down, gold goes up. Thousands of years of historical precedent suggests that gold is an excellent, stable store of value, as it’s rare, can’t be minted, and has both cosmetic and engineering applications. This makes gold an excellent hedge against all sorts of future uncertainties.

Diversity Is Key

In practice, the price of gold is derived from a number of factors, including both speculation and demand. Over the past two decades, the price of gold has fluctuated significantly, meaning that someone who bought while it was high could very easily lose money when they went to sell several years later.

This means that you shouldn’t count on your gold like you do other investments in your retirement portfolio. You can certainly buy gold at a low point and sell for a profit, but that’s not guaranteed by any stretch. Instead, use gold as a way to increase your portfolio’s diversity. Your goal here is to ensure that future events will affect different parts of your portfolio differently, keeping you safe from a single bout of bad luck in a particular market.

Allocated Gold vs Other Types

There are a number of ways to hold gold in your portfolio. Allocated gold is one of the safest, as it gives you ownership of physical gold that’s kept for you by a professional vault, usually a bank. You actually own the gold, you can take it out if you wish, and it is stored by an insured custodian who takes appropriate measures against theft.

There are some pretty big downsides to allocated gold. For one, it’s expensive. You have to pay for the bank to store your gold. You usually don’t have to pay a lot, as gold is pretty compact, but you can expect to pay about 1% of the value of your gold to store it for 8 years. On top of that, owning physical gold means that you can’t sell or buy it in even dollar amounts Instead, you’ll have to live with selling the gold in the form you own it in, which can mean buying or selling more gold in an individual transaction than you might want to.

Other types of gold tend to be less safe, but are much more liquid and easier to work with in terms of your portfolio. Many ETFs are available that are pegged to the price of gold through various methods, Some investors choose to invest in gold futures contracts instead, while some purchase unallocated gold, which is gold that’s deposited in a bank in a way that’s more similar to a cash deposit than a safety deposit box. Protections for depositors vary greatly between cash and gold deposits, making unallocated gold risky in some instances.

In general, the bigger your portfolio is, the more seriously you should consider allocated gold over other options. The cost of paying for storage and the hassle of having to work with physical gold when buying and selling become proportionally smaller problems as your retirement portfolio grows in value. In exchange for these downsides, you get the true safety of owning gold that’s stored in a safe, guaranteed manner. For smaller portfolios, ETFs are more likely to be the better option for adding gold.

What Percentage Of My Retirement Portfolio Should Be Allocated Gold?

If you’ve got a big retirement portfolio, consider keeping between 5% and 15% of your portfolio as allocated gold. If you’ve got a smaller portfolio, you might want to hold a similar amount of gold-backed ETFs instead. In both cases, you’re using the gold to diversify your portfolio and hedge against future economic uncertainty, not to make money. While you can make a decent chunk of change by buying gold low and selling high, the market’s fluctuations will keep that from being a sure thing. Instead, use your stocks, bonds, and other investments to generate high returns and take advantage of gold as a form of insurance against future events.