How long should I hold a gold investment?
As you build your investment portfolio, you'll likely learn that there are more assets to invest in than just stocks and bonds - and that diversification is an important way to balance risk and reward. In fact, many investors use gold to diversify their investments as a way to protect their portfolios against a number of market risks.
However, some investments are better to buy and sell on a short-term basis and some are better to hold for the long run. Where does gold fit on that scale? How long should you hold gold in your investment portfolio? The answer varies but it's generally long-term.
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How long should I hold a gold investment?
Gold isn't the kind of asset that's going to produce impressive short-term returns. In fact, gold usually has a relatively slow and steady growth rate. Moreover, when you invest in physical gold, you'll generally pay a dealer fee above spot prices, which may take some time to recover from. However, you may be able to gain exposure to gold and avoid that fee by purchasing shares of gold ETFs.
Nonetheless, all of that underlines that gold is a long-term asset. In fact, most people who invest in the commodity will likely hold at least a portion of their portfolio in the precious metal for the rest of their lives. Here's why:
Gold protects you against inflation
The price of gold generally moves alongside inflation. So, as the prices of goods and services rise, you can expect the price of gold to follow. That's an important quality for assets on the safe haven side of your investment portfolio. After all, during periods of high inflation - like what we've been experiencing in recent years - the dollar loses purchasing power.
On the other hand, during these times gold tends to rise in value, which could protect the purchasing power of your portfolio. As such, when you add gold to your portfolio, you shouldn't do so as a short-term trade but rather as a long-term protection play.
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Gold protects you against market volatility
Protection against inflation isn't the only way gold can bring a higher level of safety to your portfolio. The commodity is also a strong source of protection against stock market volatility.
When investors are concerned that the stock market is headed into bearish territory, they tend to sell their riskiest positions and use that money to invest in safe haven assets. Gold is one of those assets. As such, when market conditions are concerning, gold tends to see an influx of demand.
As the law of supply and demand suggests, when investors flood gold as a way to protect their portfolios, the price of the commodity tends to rise. So, gold could produce gains when the bears have control of the market - making potential losses in other areas of your portfolio easier to swallow.
How your safe haven allocation should change over time
Since there's always a need for safe haven assets in an investment portfolio, you probably shouldn't ever get rid of 100 percent of your gold holdings. On the other hand, you may want to increase them over time.
It's generally advised that investors take bigger risks when they're younger. As you age, you should adjust your portfolio for less risk. After all, you'll have less time until retirement. As such, there's less time to recover if something goes wrong.
A general rule of thumb is to use your age to dictate the percentage of your portfolio that you allocate to safer investments. For example, if you're 35 years old, you should allocate 35% of your portfolio to safe havens and 65% to stocks and other high-growth investments. On the other hand, when you're 60 years old, you should allocate 60% to safe havens and only 40% to high-growth assets. If you follow this basic, yet effective asset allocation strategy, you'll have more room in your portfolio for investments in gold each year.
That all being said, most experts advise limiting your gold investment to no more than 10% of your overall portfolio.
The bottom line
If you're looking for an asset that makes for great short-term trading opportunities, gold probably isn't what you want. Instead, when you invest in gold you should do so with a long-term time horizon. Ultimately, it's important to balance risk and reward for as long as you invest and gold investments can help with that balance. So, chances are that you'll always have room for gold in your investment portfolio.
