One gold investment mistake to avoid — and what to do instead
After a surge in price growth, combined with increased uncertainty around a potential recession and future federal interest rate hikes, gold is becoming a more attractive investment option for many Americans today.
If a sense of security is what you're looking for amid the changing economic environment, gold may be a good option. Namely, gold is a way to diversify and protect your investments against downturns in other markets.
But it's important to find the right balance between how much you allocate to gold and the rest of your overall investment portfolio. Don't make the mistake of putting too much toward the safe haven and miss out on potential long-term growth elsewhere. Read on to find out how investing in the right amount of gold can help you best take advantage of its benefits.
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Avoid this gold investing mistake
In a well-rounded portfolio, gold is best used as a way to diversify.
Gold, like some other asset types, is an example of a "'non-correlated' asset to most other financial assets," says Gregory Crofton, CFP, founder of Adap Tax Financial. "This means it increases in value when other assets decline and vice versa."
That's the main reason you can benefit from these assets when markets are volatile. Take 2022 for example. The S&P 500 actually ended the year at a loss of over 19%, while gold prices were pretty much at the same place at the end of the year as they began.
"Having non-correlated investments is a basic benefit of diversification to smooth returns (or reduce the decline in value of your investments during difficult times)," Crofton says. "But there are other investments that contribute to better long-term returns that also smooth, such as a mix of equity, bonds and other commodities."
Because gold isn't necessarily known for its long-term growth compared to these other investment options, it can be a mistake to invest too big a portion of your portfolio in gold, if you decide it's right for you. Given a longer time span, the S&P's growth far outpaces gold and other alternative assets, for example.
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How much should you invest in gold?
Even if gold shouldn't make up the bulk of your portfolio, it can still be a great asset for long-term investors.
Experts typically recommend keeping your gold investment to around 5% or 10% at most.
"Gold does add another layer of diversification and can act as a hedge in times of turmoil," Trent Porter, CFP, founder of Priority Financial Partners, recently told CBS News. "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."
With a smaller gold investment, you'll still get to reap the benefits. When inflation is high, for example, and gold prices rise — you'll see your investment value increase, too. And during periods of economic downturn, gold can help you weather losses by acting as a stabilizing force.
But for long-term investors, traditional stocks and bonds may also be necessary to experience growth over time. With the right allocation, you can have the best of both worlds. Think a gold investment could be right for you? See how gold can help you work toward your goals with a free investment guide.
The bottom line
One of the most important things to consider if you're looking to invest in gold is how much to invest. A good benchmark is around 5% to 10%. This will allow you to reap the benefits of gold as a safe haven and store of value, while still growing your portfolio with traditional investment assets over time.
If you're considering investing in gold, speak with an expert who can help guide you toward the right plan today.
