If you listen to the radio, you have no doubt heard the frequent commercials urging you to invest in gold as well as the varying opinions on how much of a portfolio should be invested in gold and other precious metals. The frequency and timing of these pro-gold commercials seem to have some correlation to how dire the economic circumstances happen to be at the time. It is during these dire economic times that gold has tended to perform best. In more prosperous times, the metal seems to lag.
From a diversification standpoint, investing a portion of your portfolio in gold has historically made sense. Looking back at the last 10 years, gold has significantly outperformed stocks. However, if you expand that time horizon, stocks have had an edge over gold.
While a fairly solid argument could be made that it makes sense to have gold as part of a diversified portfolio, the bigger question remains: How much do investors include in their portfolio and what is the most cost-effective way to do so?
An allocation of 5 to 15 percent in gold seems to be the general target for most investors. However, since no two investors are the same, the decision to invest in gold and how much will depend on the goals and risk tolerance of each individual.
According to the Federal Trade Commission, “You see the ads on TV and online, and you hear them on the radio: they tout gold as a solid investment. It's true that people sometimes use gold to diversify their investment portfolio: it can help hedge against inflation and economic uncertainty. But how much gold to buy, in what form, at what price, and from whom, are important questions to answer before you make that investment.”
The Federal Trade Commission (FTC), the nation's consumer protection agency, goes on to say, “If you are interested in buying gold, do some digging before investing. Some gold promoters don't deliver what they promise, and may push people into an investment that isn't right for them.”
Investing in gold
There are several ways to incorporate gold into your portfolio, each varying in the costs associated with them.
Gold mining stocks — Like some individual stocks, the volatility can be considerable, more so than the metal itself. Some mining stocks may pay dividends, and the cost associated is the same as trading other stocks.
Coins/bars — If you are buying physical gold, select a reputable dealer and have a good understanding of the markup, shipping and storage costs. These costs have the potential to reduce the investor’s return by 10 to 15 percent.
Exchange Traded Funds (ETF) — Purchasing gold in this form will likely have the lowest holding costs based on the fact they can buy in bulk and they hold the gold on behalf of investors, thereby removing the markup, shipping and storage costs. The two largest gold ETFs on average charge between 0.25 to 0.40 percent.
Mutual funds — There are many mutual funds that focus on gold mining stocks. Many of the funds can invest in both physical gold and mining stocks. Investors will want to compare both the long term performance and the expense ratio of the fund before investing. The expense ratio of the average precious metals fund is approximately 1.4 percent.
Whether you are someone who wants to physically own the precious metal or who wants a low-cost alternative way to diversify your portfolio, you will want to consider your time horizon and risk tolerance before determining how much of your portfolio you want to allocate to gold, if any. Additionally, if you decide to add gold to your portfolio, research the various investment options to determine which one fits your needs and that you are most comfortable investing in.
Brett N. Karras is the president of The Karras Company, an independent registered investment adviser with approximately 800 million in assets under management.