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If you’re looking to diversify your investment portfolio in your pre-retirement years, you may be considering allocating some of your money to gold.
First-time buyers in their 50s and 60s should invest only a small portion of their portfolio toward gold. Here are some simple allocation guardrails for beginners who want to benefit from the protection aspects of gold and price rallies without putting too much money into the alternative asset.
Pros and cons of investing in gold
The precious metal can act as a hedge against inflation and safe haven during economic uncertainty. It can also diversify your portfolio, which may be a good idea if you only invest in stocks and bonds.
But there are also downsides. Gold can underperform assets with more growth potential, like stocks, which means investing too much in the alternative asset could mean limiting your long-term growth. Investing in gold can also come with some complications you don’t have to consider when buying stocks or bonds, like storage costs if you’re buying tangible assets, as well as complex financial instruments such as futures and swaps.
And overall, investing in too much of any asset can lead to significant risks in an investment portfolio, so it’s important to build your gold position responsibly.
How much to invest in gold
The amount of your money that should go towards gold should you choose to buy the precious metal will depend on your unique financial situation, including your goals and risk tolerance. But a common approach experts recommend is allocating just 5-10% of your portfolio to gold.
This gives you upside and inflation hedging while allowing you to spread your capital across other investments. People who have higher risk tolerances and fewer immediate income needs can get closer to the 10% threshold. It may also make more sense to make gold a larger percentage of your total assets if you have a lengthy time horizon and receive income from sources like Social Security and pensions. Investment research firm Morningstar defines limited exposure, which is what the firm suggests for gold, as 15% of assets or less.
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Adjusting over time as you age
Investment strategies aren’t meant to be set in stone. They are fluid and subject to change, especially as you get older and your risk tolerance changes. Investors may put more into gold if their income increases and they have more cash on the sidelines. However, people who want seek volatility in their portfolio may gradually sell off gold and equities.
New investors may want to start at the low end of the range and gradually build their position if it makes sense to do so.
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