When you are building a portfolio, gold is one of the most common types of investments in the market today. Gold can provide you with a number of unique benefits as an investor. However, you do not want to allocate too much of your portfolio to this one type of asset. Here are a few things to consider about how much of your portfolio should be devoted to gold.
Investing in Gold
Gold has several advantages when comes to investing. One important benefit is that gold will help you hedge your investments against inflation. Gold is a commodity that is going to increase in value, even when the value of the dollar is going to decrease. Another benefit of gold is that it is not highly correlated to any other financial markets. Certain investments are extremely correlated to the stock market and will decline in value when stock market does. However, when you invest in gold, it is going to move independently. This will allow you to diversify your portfolio and earn returns, even if the stock market is performing poorly.
In most cases, investors will want to allocate portions of their portfolio two different investments. Instead of putting all of their money into a particular asset class, they can spread the wealth around. An investor might choose to invest in some stocks, some bonds, some mutual funds and gold. Determining the proper asset allocation can be difficult. Every investor is going to have different preferences and risk tolerances. You need to set a particular percentage of your money that you want to allocate to each investment class and stick with it.
How Much For Gold
Some investors love investing in gold so much of that they want to make it the majority of their portfolio. While this can be tempting, you should keep your portfolio well balanced and avoid this costly mistake. Most experts recommend that you should only hold between 10 and 15 percent of your portfolio in gold. Some investors might want to have as much as 25 percent of their portfolio while others might only be comfortable with 5 percent. Customize the investment mix depending on your individual investment objectives and preferences.
Risks of Buying Too Much Gold
Even though you might want to get as much gold as you can, there are a few reasons that you may want to limit your investment. For example, even though gold provides you with steady returns, the stock market can outperform gold in some situations. Therefore, if you put too much money into gold, you could be missing out on better opportunities in the stock market.
Another reason that you may want to stay away from a large percentage of gold is that it does not provide you with any tax advantages. When you invest in stocks over the long-term, you are going to only have to pay 15 percent in long-term capital gains taxes. When you sell gold, you will have to pay taxes as if it were regular income.