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While a number of investors may focus on assets like stocks and bonds when saving for retirement, alternate assets — such as physical gold, silver, or other precious metals — can also potentially be part of a portfolio, says Kevin DeMeritt, founder and chairman of precious metals firm Lear Capital.
Stocks often play a large role in Americans’ investment efforts. Federal Reserve research indicates more than half of U.S. consumers are using a defined contribution plan, such as a 401(k), to save for retirement. A study from the Employee Benefit Research Institute and Investment Company Institute found that 94% of 401(k) plan participants have at least some investment in equities.
That’s not necessarily a negative thing; however, some investors have found obtaining a diverse array of assets can offer some benefits.
To create a balanced portfolio, someone who’s considering investing in the cryptocurrency market might, for example, pair that investment with other assets, Kevin DeMeritt says.
“If you’re going to own some cryptocurrency, make it part of a diversified portfolio of precious metals, cryptocurrency, and maybe a couple of other things — [such as] real estate — that are good hedges, as well,” he says.
DeMeritt has seen younger investors who initially put a lot of faith in cryptocurrency shift their focus to the precious metals market due to the volatility crypto has shown.
“They want to diversify,” he says. “It might be, ‘I’m going to take 30% or 50% of my crypto and move that over’ — which I think is great. They want to make sure they have something in their hands and see how that market works.”
Risks, Rewards, and Reducing Losses
The stock market has, for the most part, provided a 10% average annual return, according to the Securities and Exchange Commission; this is most likely closer to 6% or 7%, when you consider inflation’s effect. Individual stocks, though, can offer the possibility of even more sizable profitability.
An $1,000 investment in 2003 in Monster Beverage, for instance — which produced the highest 20-year return among S&P 500 index stocks — would have netted you more than $830,000 by 2023, according to CNBC. The energy drink company showed a 39% annualized return over that period.
The stock market, however, can be affected by a variety of factors, ranging from economic concerns to conflicts that occur between nations outside of the U.S., so the chance of earning hefty returns isn’t guaranteed.
Gold prices historically have shown a different reaction to many of those elements, which means including the precious metal in your portfolio can be a way of proactively trying to buffer the impact stock-related losses could have, Kevin DeMeritt says.
“In times of war or terrorism, usually you’re going to find the markets become extremely volatile,” the Lear Capital founder says. “The volatility of gold is not going to be the same as what we’ve seen with war or inflation [and] the stock market.”
Individual investors aren’t the only ones to express an interest in gold because of its performance.
A recent World Gold Council survey involving 70 central banks found more than three-quarters of the banks — 76% — say gold’s role as an effective portfolio diversifier is one of the top reasons to hold the precious metal in their reserves. Gold’s long-term value and performance during times of crisis were also top factors.
“It’s been around for 5,000 years,” Kevin DeMeritt says. “People [moved] to paper currency; now they’re moving to digital currency — and what are the central banks holding? Gold. Because they understand we’ve had hundreds of currencies collapse or go away, and the gold is still there in all of the central banks’ accounts. They need something that’s physical and worth value.”
Gold Can Also Go Up
Gold is sometimes viewed as a type of safe harbor asset; however, Kevin DeMeritt feels that doesn’t necessarily paint a vivid enough picture of precious metals’ potential.
“One of the biggest misconceptions is that gold is this relic and doesn’t have this great performance record,” he says. “It has dramatically outproduced the stock market, and no one really talks about it. The misconception that gold can’t produce profits for people, and it’s just a safety-type asset, is completely incorrect.”
A number of investors, though, are aware of gold’s performance capabilities, he says, which has helped contribute to the precious metal’s value.
“When investors are worried about the economy, usually you get more people turning to gold, which can drive up its price,” Kevin DeMeritt says.
Gold and silver have, in fact, fared better than some of the major stock indexes in the past.
Gold outperformed the S&P 500 index during six of the last eight recessions, according to Forbes. A Lear Capital analysis of gold prices over a 20-year period found they rose a whopping 566%; meanwhile, silver increased in value by 377%. During that same time frame, the S&P 500 grew by a lesser amount — 253% — and the Dow Jones Industrial Average rose 225%.
If you’re hoping to offset the uncertainty some other types of assets can present — and possibly take advantage of the price spikes gold can experience, such as its recent rise to a new record amount, more than $2,450, on May 20 — including physical precious metal assets in your portfolio is one potential approach.
“Gold can be a great diversification tool,” Lear Capital’s Kevin DeMeritt says. “It’s a great time to add at least some portion of a portfolio into that asset category. Diversification usually works out much, much better over the long term than a put-one-egg-in-your-basket-and-watch-it-closely mindset.”
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