Why Buying Gold Should Only Be a Small Part of Your Investing Portfolio

by Investing School on January 6, 2010

Investing in gold has become increasingly popular in recent months, as evidenced by all-time high gold prices. So, should you buy gold? And if so, how much?

Gold is something that has a place in the portfolio of any person doing serious investing, but it can’t be the thing that you rely upon solely. Many individuals have made the mistake of investing in gold as their primary investment. While investing in gold might be better than just keeping your money in the mattress, there are better ways to invest than just going with gold coins, bullion, bars, or even gold funds.

The best use of gold is as a portfolio diversification tool, since it provides a nice bit of security for investors, and helps hedge against inflation, political and economic uncertainty. Making it a small part of your plan is smart, but dedicating too much of your portfolio to gold is both foolish and unnecessary.

Gold lacks serious growth potential

As you look at your portfolio in a serious manner, you should be looking for things that will provide steady growth, things that will provide reasonably fast growth, and some items that have the possibility of exploding into a huge growth machine. Different stocks and funds are good for these purposes, while real estate can provide a similar range of investment returns. Gold is one that would generally fall into the “slow growth” category. People who got into gold about ten years ago might disagree with that, since the price has more than tripled in that time.. Much of the opportunity has evaporated, though. Now, you can only expect slight growth.

That is not to say that gold will fail in providing solid return. It’s a nice thing to include as a small part of your plan for a host of different reasons. When you start investing more resources in gold, though, you are taking away money that could have been invested in other things. For people with a fixed amount of capital, making the most of your investment money has to be the most important thing on your list.

Gold’s primary purpose

Gold is one of those items in an investment portfolio that must serve a very exact purpose. It is smart to invest only if you are looking for a way to add a tangible, secure element to your portfolio. This means that people who have stocks, bonds, mutual funds, and the like are smart to add something to their portfolio that they can actually hold. The chances of your stocks going belly up and the economy failing are small, but it is still good to have an insurance policy of sorts in case that happens. A small investment in gold can be that insurance policy.

When you invest too much of your portfolio in gold, it goes from being a nice, small asset to being a liability. This not only removes your ability to make other strong investments, but it also makes gold something that has less luster. This is not a scenario that anyone needs when building their portfolio.

Gold lacks the residual income power

The first rule of investing for everyone should be that your investments need to provide returns in different ways. Some investment products like bonds will bring a fixed return after a certain amount of time. Stocks can bring a return whenever you sell the shares. Real estate investments can bring appreciation in value, as well as monthly payments if you rent out the property. With gold, there is only one way to make money. You can buy it and you can sell it for a higher price.

When you make gold a huge part of your plan, you remove the ability to rake in residual money. Anyone who has made a significant amount of residual money can tell you just how nice it is to earn dollars for no work. Gold provides nothing in these terms, which gives you less ability to re-invest those returns in something new and exciting.

Gold has its purpose, but don’t go too crazy when buying up bars, coins, and other things. As a small part of your plan, it can make a lot of sense and it can make you feel better about the total, tangible value of your investments. When it gets a little bit too ambitious, it takes away your ability to purchase other items.

While others are bringing in potentially huge returns with their high-risk elements, you will be plodding away while making a small percentage return every year. While others are reinvesting their dividends and getting richer, you will be stuck without that opportunity. Keep this in mind when allocating your money to purchase individual assets.

About the Author: Shaun Connell is a gold coins enthusiast, and runs Learn Gold Coins. To learn more about gold, check out How to Buy Gold Coins, an introduction to beginners.

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