How To Help Recession-Proof Your Portfolio With Gold
The potential for a recession can cause investors to panic. But having a diversified portfolio gives you some protection during an economic downturn.
Some people turn to gold to help “recession proof” their portfolios, as the precious metal is often considered a safe investment. It’s certainly not the only tool available to protect your portfolio from the ups and downs of the market that a recession can cause, but it’s an important resource.
How gold has behaved during past downturns
Gold does not behave the same in every downturn, but it often does differently from stocks. For example, gold was a big winner during the Great Recession, rising from $700 per ounce in 2007 to $1,000 per ounce in 2009. Stocks, on the other hand, experienced a now famous crash.
Gold can fold when stocks are saturated, which reduces an investor’s exposure to stock market volatility. Although retirees can diversify into a few stocks and funds, they can still lose value if the broader market declines. That doesn’t always happen with gold.
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Adding gold can help your portfolio
Adding gold to your portfolio can be useful if you have a large exposure to stocks. Gold can cushion your downside during recessions and market corrections while keeping your stock portfolio intact. It is also a useful resource if you have a long time horizon before retirement or you have a lot of extra money to pay for everyday expenses.
Just because gold makes sense for your portfolio doesn’t mean you should rush to get into it. Many experts suggest small, strategic assignments that are linked to a broader plan. Investing at least $100 a month in gold, for example, allows you to grow your position over time instead of taking drastic measures with your existing portfolio.
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When to hold gold
Although gold offers many benefits, it is not an asset for everyone. Diversifying into precious metals can do more harm than good if you don’t have a short-term asset that can provide you with cash. These buffers — bonds, certificates of deposit (CDs) and high-yield savings accounts, for example — ensure you have cash to cover your short-term needs while investing in growth-oriented assets like stocks and gold.
Gold may be a bad choice if you don’t have an emergency fund or have debt. Investors should consider high-interest debt in particular, such as credit card debt, before investing in assets such as gold. Financial advisors generally recommend having an emergency fund that can cover your expenses for at least three to six months.
Young investors with long-term horizons may want to focus on growth-oriented assets, such as stocks.
Investors new to gold may want to stick with physical precious metals. Fees are often higher and the process is more complicated than simply buying an exchange-traded fund (ETF) that gives you direct exposure to gold.
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Building a recession playbook with gold
The recession playbook becomes more important as you approach retirement. As people get older, they tend to value lower income portfolios.
Gold is one hedge you can use to combat market uncertainty, but there are other reliable assets to consider. Cash is the safest, but it will gradually lose purchasing power due to inflation. You can keep money in a high-yield savings account and invest in bonds and equities to reduce the impact of inflation on your portfolio. Bonds and CDs also allow you to lock in a low-risk annual percentage yield (APY) on your money.
Ensuring the best recession involves a holistic approach, rather than a single product or letting your emotions guide your investment decisions.
