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How does gold diversify your portfolio?

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Gold's ability to diversify your portfolio can be helpful during difficult economic conditions.  Getty Images/iStockphoto

From recent stock market struggles to inflation and interest rate increases, to layoffs at well-known companies (particularly in tech), there have been many signs of economic turbulence lately. Amidst that uncertainty and volatility, some investors may be considering gold investments.

While not all investments pan out as expected, many people turn to gold to diversify their portfolios. As other assets like stocks struggle, for instance, other investments like gold might rise or at least hold up better. So, by having a diversified portfolio, an investor might be able to more effectively weather economic headwinds.

Here, we'll take a closer look at gold's potential role in portfolio diversification. If you think you could benefit from investing in gold then start by requesting a free information kit to learn more about this unique opportunity.

How does gold diversify your portfolio?

Gold can diversify your portfolio in several ways, as the price of gold can respond to economic conditions differently than other assets such as stocks and bonds.

For example, gold is often considered to be a hedge against inflation, although that doesn't always end up being the case. Still, in 2022, amidst high inflation, gold prices ticked up 0.4%, according to the World Gold Council, based on Bloomberg data. In comparison, the S&P 500 index, which is often used as a proxy for the U.S. stock market, dropped nearly 20% in 2022, according to S&P Dow Jones Indices.

So, while you might have still experienced negative returns overall in 2022, your portfolio might have held up better if you had some gold to diversify stock returns.

And inflation might not be the only underlying factor. Consumers' economic pessimism also correlates with gold prices, according to the Federal Reserve Bank of Chicago's analysis of a University of Michigan study. 

If consumers start souring on the economy, that might hurt companies that rely on consumer spending, for instance, which could then drive down their stock price. Yet if you held some gold, a rise in precious metals prices could at least partially offset stock losses.

Gold can also provide diversification at times against other assets, like bonds. While both gold prices and bond prices are prone to falling amidst rising interest rates, gold held up better in 2022. As mentioned, gold prices rose 0.4%, while the Morningstar U.S. Core Bond Index fell 12.9%.

You can learn more about gold's ability to diversify your portfolio - and the potential support it can provide during times of economic uncertainty - by requesting a free information kit from Goldco now.

How is gold's ability to diversify a portfolio beneficial?

By diversifying a portfolio, investors can potentially reduce risk and sometimes increase long-term gains.

Gold won't always beat stocks and bonds as it did in 2022, but that exemplifies how the asset can provide diversification and perhaps reduce losses. Sometimes the inverse will happen, where other asset classes beat gold returns, which is why you might not want to over-invest in gold either. Or, you might find that you prefer other diversification assets besides gold. Either way, it's good to know your options.

And while in some scenarios you might have higher returns if, say, you only invested in stocks rather than a mix of asset classes, it's hard to predict when that will occur. So, investors often prefer to diversify and try to find more stability.

If you can reduce the risk of large losses, for example, you might avoid the temptation to sell assets as they're falling. That way, you can stay invested longer and give your portfolio time to hopefully grow long-term.

How to invest in gold to help diversify your portfolio

To invest in gold for diversification, you can choose from several options, such as:

  • Investing in a gold ETF: A gold ETF can give you access to gold without having to physically acquire it. Instead, you can invest in an ETF much like you would for other stocks.
  • Buying gold bullion: Some investors prefer owning physical gold, so you can buy gold bars or gold coins, such as from online dealers.
  • Investing in precious metals companies: Another way to get exposure to gold, though not quite as direct, is to buy stock in precious metals companies that are involved with gold. If gold prices go up, for example, then the precious metals company's stock price might also experience an uptick.

Learn more about your gold diversification options by requesting a free information kit now.

How much gold should you put into your portfolio?

Figuring out how much gold someone should put in their portfolio can vary depending on factors like your age, risk tolerance, portfolio composition, etc.

For example, someone in their 20s might prefer to invest more in stocks in their retirement portfolio, as they have a long time to try to let their assets grow, even if there are bumps along the way. Yet someone around retirement age might look for investments that are considered to be safer stores of value, like gold, though gold prices are subject to decline, too.

In general, if you make gold investments, you probably want that to be a slice of your portfolio rather than the whole pie. Otherwise, you're not diversifying. A rule of thumb to consider is investing 5-10% of your portfolio in gold.

Overall, investing in gold can potentially help you build a more diverse, stable portfolio. As economic conditions change, you might not get caught up in the winds as much if you have some assets like gold that can hold up even as the broader economy falters. So, as you're reviewing your portfolio, consider whether it makes sense to add gold.

Have more questions? Learn more about this unique investment opportunity by requesting a free information kit now.

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