Never have precious metals earned so much respect among investors. Financial advisers are suggesting precious metals to their clients, while TV commercials boast about the performance of gold and silver over the past decade – and it’s all for one very good reason. While stocks were in the dumps, gold and other precious metals stamped out 300% returns in just one decade.
Knowing the Risk
Historically, gold and silver are very good hedges to inflation and tend to track the greater change in money supply over a period of decades. Thus, precious metals are a perfect commodity to own when stocks and other investments are performing poorly, which is generally during the same time the government begins inflating. However, it is important to remember that precious metals are volatile and do not track inflation day by day.
Allocating for Success
Due to the way precious metals rise and fall and their historical track record, they're best held for periods of time around 15-20 years and should be added to a retirement account later rather than sooner. Precious metals are designed to underperform stocks in good years, but outperform in the bad years – all the while tracking the changes in inflation. Thus, they're best added as the investor ages to allow the account to have maximum gains while the investor is young, while producing more reliable gains as the investor ages.
How to Buy
Investors can buy both physical metals or exchange-traded funds and mutual funds, which both have their own distinct advantages. Investors who plan to own a several thousand or tens of thousands of dollars in gold are best choosing physical metals, as they'll avoid the annual fees on ETFs and mutual funds. Investors will small amounts of capital to invest are likely better served with ETFs or mutual funds, as the cost of securely storing their own gold may exceed the annual expense on available funds.
How Much is Enough?
When adding precious metals to your retirement plan, it's important to allocate enough metals for a reliable hedge against inflation. You want safety from economic turmoil, but you not want to own so much metal that it drags on the performance of your account. In this case, allocating 5-10% of your total retirement portfolio to precious metals will protect it from large scale economic events – all while allowing enough allocation into other better performing and riskier investments.