Gold and Your Portfolio

Michelle Kuehner |

By Gary Silverman

This is the conclusion of a series of articles I wrote about gold back in 2011. Since I had almost nothing to add to the subject, and since gold is hitting all-time highs with investors scrambling to buy, I’m repeating those columns with some commentary at the end.

Okay, in the last two installments we looked at how most people invest in gold and what makes gold go up (and down) in value. Today I’m going to discuss what part gold should play in your portfolio.

First, if you are one of those people who sold all their stocks because they went down, and sold all their bonds because they weren’t paying very much, and then took the proceeds and are now 100 percent in gold…

Bad boy! No! Stop that!

In other words, I feel this was an unwise move.

“You’re a fool, Gary,” you may retort. “I’ve made 25, 50, 100% on my money since I bought gold, have you made that much? Have you?”

Nope. Neither did I put all my money into Las Vegas real estate, General Motors, Enron, or tech stocks circa 2000. You made money. I’m happy for you. But don’t think it was investing genius. It was luck. You see, the fundamental flaw Mr. 100% Gold made wasn’t in buying gold, it was putting all of his money in a single investment.

Fundamental to any strategy I use is diversification. By spreading your money across a variety of investments (the more dissimilar, the better) you are hedging your bets in case one of your “sure things” turns out not to be as sure as you hoped. Buying some gold can be a good diversifier. Buying nothing but gold is the antithesis of diversification.

People want to have all their money in whatever goes up the most. That’s understandable. What they don’t understand is that predicting what will go up the most is a fools’ game. Nobody knows. Everybody guesses. And sometimes, guesses are right. When a guess pans out, that doesn’t mean the person who made the prediction is brilliant, more often than not, it means the prediction was lucky.

But remember, I did say that buying some gold can be a good diversifier. So how much should “some” be? The consensus of the investment community is that a portfolio with around 5% gold is good. They also tend to agree that funds that invest in gold, precious metals, and mining companies should be around 10%). Theoretically, you could have 20-30% of your portfolio in gold and do okay financially. But most of you would vomit from the roller coaster ride that amount would take you on.

Gold: it’s sometimes loved (at times too much) and sometimes maligned as an investment (at extremes, unfairly). But gold is certainly appropriate for many portfolios if done in a reasonable way.

Back to the present. Things are different now, sort of. Stocks have been up…a lot. Bonds are back to paying a decent amount of interest. Yet folks are driving up the price of gold. Why? The markets look scary, inflation is being stubborn, and I hear there’s a contentious election going on where everyone is convinced that the other candidate will destroy America.

So, if you want to buy some gold feel free, but don’t be stupid about it. And if you don’t want to, there are plenty of other ways to diversify your portfolio. I was neutral on gold in 2011 and still don’t have any in my own portfolio.