How Investors Can Use Gold as a ‘Shock Absorber’
Social Security and pension programs, where available, help many retirees cope with rising living costs, but steady income from these sources is often insufficient. That’s why people also build nest eggs throughout their lives, investing in stocks and bonds instead of leaving their chances of a comfortable retirement to luck.
While those traditional cash-based assets can form a good foundation for retirement savings, they also present their own risks. A correction in the stock market, for example, can reduce the nest egg at a time when retirees need to withdraw. To reduce risk, some investors turn to gold, which can act as a small hedge that hedges your portfolio against inflation and uncertainty. Read on to learn how gold can act as a “shock absorber” when markets are shaken.
What is a ‘shock absorber’?
Gold does not provide capital in the same way as bonds or equity stocks. You won’t get interest or cash flow by holding gold — but it can act as a shock absorber. These types of assets soften the portfolio impact of stock declines and can reduce your risk.
Precious metals like gold don’t always go up when stocks go down, but in general, they don’t behave the same way that stocks do. If your portfolio is made up mostly of stocks and mutual funds, you are more vulnerable to market downturns than a diversified individual. The precious metal can remain strong and may perform even more if the stock market takes a while.
To be sure, you should still have some stock exposure to maximize your portfolio’s potential. But retirees can benefit by allocating 5 to 10 percent of their portfolio to gold.
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Designing a small golden area
While 5% to 10% is a typical range for gold allocation in a portfolio, you can start with a number as small as 3% and work your way up. A small benchmark helps ensure that you don’t have to sell many assets in your current portfolio to reach your target. And people who are still working can prioritize gold investments leading up to retirement to reach the limit without selling any of their stocks by using their income to buy smaller positions.
Gold’s low allocation also keeps risk and costs manageable. You can cut out a lot of the complexities of investing in gold with gold exchange-traded funds (ETFs). These funds are highly liquid and usually have low fees. Each ETF has an expense ratio that shows how much you’ll have to pay to hold shares.
Although physical gold has its advantages, it is not suitable for beginners due to low liquidity and high fees. You also have to consider how you store the physical gold, while the ETF handles all the behind-the-scenes work for you.
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Cash flow considerations
Although buying gold has its advantages, you should not raid your savings or skip important expenses to build your position. Gold is an investment that you can accumulate after checking the basic boxes of personal finance. Make sure you have an emergency fund and pay off any high interest debt.
Financial advisors often recommend that you have at least enough money in an emergency fund to cover your expenses for three to six months. However, retirees can choose to save enough money for one to three years.
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