How to balance gold with the rest of your portfolio

If you're an investor putting money aside for the long term, you may already be familiar with the importance of diversification.

A diverse portfolio can help you make the most of your investment timeline. You might have some investments allocated toward growth assets, which can help you build wealth — often in the form of stocks and funds that contain them. But you may also have a portion of your money invested in assets better suited for security and stability. These can help weather periods of downturn in other markets, so you're not as affected by volatility.

While there are multiple investments you can use to diversify with a focus on stability, gold is one common asset type. Gold is often seen as a hedge against inflation. If you're interested in diversifying with gold, there are a few things to know about balancing the precious metal with your overall portfolio.

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How to balance gold with the rest of your portfolio

These tips can help you ensure you're making the best choices for your investment goals when adding gold to your portfolio:

Choose the best gold investment type for you 

There are multiple ways you can invest in gold, and choosing the right method for your goals can help ensure your gold investment aligns with the rest of your portfolio.

For example, retirement-minded investors may opt for a gold IRA — a retirement account that you can use to hold physical gold. Or, investors who prefer buying through a brokerage may opt for gold funds like gold ETFs, which indirectly follow gold price changes by buying into companies that rely on gold's performance, like gold mining companies. 

The type of gold investment you make can impact the fees and upkeep required for your gold investment, which you should take into account when thinking about the total cost of your gold investment alongside the rest of your portfolio. Physical gold, for example, may require additional costs for safekeeping, whether you choose to hold it yourself or work with a custodian. 

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Pick the right allocation

Experts typically recommend keeping your gold investment to around 5% to 10% of your total investments. A small allocation can help you reap the benefits of gold while leaving plenty of room to capitalize on the growth that more traditional assets can offer.

"Understand that gold generally does well when the market does not, but those moments happen in short periods compared to bull markets," says Max Pashman, CFP, founder of Pashman Financial. "Over the long run, markets have been resilient and have historically been an excellent choice for long-term investors."

If you put too much money toward gold (or another safe haven asset type) you could miss out on the potential growth that stocks and bonds can offer over time. But not diversifying at all could put you more at risk in more turbulent markets.

"Gold does add another layer of diversification and can act as a hedge in times of turmoil," says Trent Porter, CFP, founder of Priority Financial Partners. "But because there have been many long stretches where gold has drastically underperformed stocks, an allocation of less than 10% usually makes the most sense."

Invest for the long term

Long-term investors can greatly benefit from gold investing, since they can use it as a hedge throughout various economic cycles. 

Whereas short-term fluctuations are a part of any asset, including gold, implementing it into your long-term investment strategy is can be a more effective way to benefit from gold as a store of value. 

In fact, a 2019 report from the SPDR Gold Strategy Team from State Street Global Advisors looked into the value of gold on a hypothetical portfolio which also included global stocks, real estate, private equity and more. It found that holding between 2% and 10% worth of gold investments between 2005 and 2019 may have improved the hypothetical portfolio's cumulative returns and lowered its maximum losses, compared to portfolios without any gold-backed investments.

The bottom line

Investing in gold can be a strategic way to diversify your portfolio against market conditions and maintain the precious metal's store of value of the long run. If you're considering putting a portion of your portfolio toward gold, make sure you consider how much you should allocate, choose the right investment type for your goals and prepare to invest long-term. Using gold as a part of your broader economic plan with a well-diversified portfolio can help you grow your money over time.

Learn more about your gold investment options with a free investment guide.