A Practical Guide to Gold's Role, Allocation, and Common Mistakes

Political uncertainty, trade wars, deficits, and hot wars often make headlines, leading many to ask a fundamental question about their retirement savings: "How much gold should I have in my portfolio?" The answer isn't as simple as you might think.

What Role Does Gold Play in a Portfolio?

Clients approach this question from different perspectives, and the role of gold can vary based on your intention.

1. Portfolio Insurance: Many people want gold as a form of insurance, in case of a major economic collapse or other crisis. They want a tangible store of value that provides stability when traditional investments are struggling.

2. A "Trade": Some see gold as a speculative trade, believing it will outperform other assets over a specific time period.

3. A Long-Term Investment: Others view gold as a long-term store of value that has a place in their portfolio simply because they believe in its fundamental value over time.

How Much Gold Should You Actually Own?

The right amount of gold for your portfolio depends heavily on your reasons for owning it in the first place.

• Under 10%: This is a less consequential decision. Allocations under 10% of your total portfolio are unlikely to significantly impact your long-term expected returns and can be approached more flexibly. This is often the case for people who want a small amount of exposure for a trade or a general long-term holding.

• 10% or More: Allocations over 10% are a much bigger decision relative to the rest of your portfolio. This starts to make a real impact on your long-term expected return, so it should be a strategic choice. This level of allocation is more common for those who view gold primarily as an "insurance play" and are prepared for a lower expected return in exchange for a hedge against extreme scenarios.

The Best Ways to Own Gold

There are two main ways to gain exposure to gold in your portfolio:

1. Physical Gold: You can go out and buy physical gold coins or bars from an online retailer or your local coin shop. This gives you direct ownership and no counterparty risk.

2. Financial Products: You can buy a financial product, most commonly a gold ETF (Exchange Traded Fund), where an investment company buys and holds the physical gold for you, and you own shares (a "receipt") in that fund.

The best method for you will depend on your goals. For most retirement investors, ETFs offer a good combination of low cost, liquidity, and convenience.

Gold vs. Other Inflation Hedges

If inflation protection is your main objective, remember that gold isn't the only tool available. Other assets that can serve a similar purpose include:

• Real Estate Investment Trusts (REITs)

• Treasury Inflation-Protected Securities (TIPS)

• A basket of other commodities

Owning a diverse basket of these inflation hedges can provide a more well-rounded approach, so you're not solely dependent on a single commodity to protect your portfolio.

Common Gold Investment Mistakes to Avoid

1. Paying Huge Markups: If you buy physical gold from a local coin shop, you could end up paying a 10-30% markup over the spot price. It's often cheaper to buy it online and have it shipped directly to you.

2. Forgetting Tax Implications: Gold has special tax implications (collectibles tax) that are subject to change. Be aware of these rules, especially if you plan to hold it in a brokerage account.

3. Trying to Time the Market: It's incredibly difficult to time the market. Trying to buy gold only when the economic news is scary often means you're buying at peak prices. A dollar-cost averaging strategy works better.

4. Emotional Investing: Any investing decision driven by emotions (like fear from a news report) has a high chance of leading to regret. Make your decisions based on a long-term plan, not on short-term headlines.

Do You Need Gold in Your Portfolio? (A Final Thought)

The short answer is no, you don't need gold to have a great retirement portfolio. You can absolutely have a well-diversified, resilient portfolio without owning any gold at all. However, depending on your specific situation, risk tolerance, and goals, it could make sense to have a small allocation. The key is to make a thoughtful, strategic decision rather than an emotional one.

At Barrett FP LLC, we offer expert financial planning on an hourly basis, focused entirely on helping you achieve your goals.

Learn more about how we can help you with comprehensive portfolio planning and see if we're a good fit.