How gold reduces your investment risk

Inflation, high interest rates and volatile market conditions have become the norm for investors over the past several months, which may have some craving a bit more stability.

If you tend to be risk-averse, then gold may already be on your radar. The stability of gold against fluctuating markets and currency devaluation can make an appealing case amid uncertainty about where prices will go or whether a recession is coming.

"The benefit to adding gold to your investment portfolio is that it is a hedge for a falling market or when the world is in chaos," says Dan Casey, investment advisor representative and founder of Bridgeriver Advisors. "As the saying goes, 'When nothing makes sense, gold makes sense.'"

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How can gold reduce risk?

Some amount of risk is healthy to have as an investor. After all, riskier investments can have better returns over time. That's why long-term investors can afford to maintain more risk than those with shorter time horizons, and why experts recommend investing in stocks and bonds to grow your portfolio. 

Even so, dedicating a portion of the money you invest to an asset like gold may be a good way to reduce some of the risk you take on. Here are two reasons why:

It helps you weather losses 

For one, gold is used by many as a portfolio diversifier. Diversifying your portfolio is one of the best ways to make sure your long-term investments are designed to weather ups and downs in the market.

What diversification looks like for you depends on your personal strategy and goals. Some prefer to diversify using primarily stocks and bonds, for example. However, you may help lessen your risk by investing in alternative assets, too. Gold, especially, is one asset that tends to perform better when the stock market is down (and vice versa). 

Diversifying with gold can be a way to make sure you maintain some stability even as prices fall elsewhere — reducing the overall risk you take on in your portfolio.

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It maintains value

Secondly, gold is seen as a hedge against inflation. It can preserve your purchasing power when prices rise. 

The price of gold tends to go up when the price of the U.S. dollar falls. During periods of high inflation throughout the past few decades, gold prices remained relatively stable even as the dollar went down. As one example, the dollar's value has fallen over the past six months, while the price of gold has risen by more than 20% over the same time. 

Gold has been viewed as a strong store of wealth for a long time, and its scarcity and durability as a commodity help its perception as a safe haven when the economy is uncertain. Today, experts cite ongoing inflation as well as concerns within the banking system following recent bank failures as some reasons people are turning to gold for stability. 

The bottom line

If you're planning to invest for the long run, risk is a part of the process. But if your current plan doesn't align with your risk tolerance, putting a portion of your portfolio in a relatively stable investment like gold can help. Not only is it a way to protect your assets with diversification but it's also a stable asset class with a history of performing well during inflationary periods. 

Consider talking to a professional who can help you decide how gold might fit into your financial plan. You can get started today and learn more with a free investment guide.