When building an investment portfolio, it’s important to remember that there’s no single perfect asset. Every asset has associated risks, usually tied to events and circumstances the individual has no power over. The best people can do is manage risk and find a balance between being exposed to it and ensuring the returns on the investment are there.
That’s where diversification comes in. Whenever someone talks about “not putting all of one’s egg into a single basket,” Financial planners talk about diversification – allocated funds into several asset classes. If done correctly, the asset classes will be negatively correlated, ensuring that the circumstances that cause one asset to lose value will not affect the other similarly.
This investment strategy is applied to maximize yield and manage risk. It doesn’t have to be used in volatile times alone but should be applied under all market conditions.
“We are currently in the middle of the greatest transfer of wealth ever,” he says. “The middle class is being wiped out, and people who think they are rich or secure with their pension are in for a rude awakening.”
David Morgan is a precious metals consultant and the author of The Morgan Report, a monthly publication in which he shares market insights and wealth-generation and preservation advice. His interest in precious metals and distrust in fiat currencies have roots in his childhood.
“He was fascinated by money when I was a young kid. He used to get 25 cents a week as an allowance in silver quarters. “But when He turned 11, it wasn’t a silver coin.
Anyone looking for proof of the value of precious metals, particularly gold in a diversified portfolio, should look no further than the volatility the world experienced last year. We saw a war emerge in Europe, and the energy crisis continued. In the United States, inflation rates peaked at 9.1% in June before dropping to 6.5% in December.
The stock market saw was media called “the worst year since 2008”, with Dow Jones losing 8.8%, S&P 500 losing 19.4%, and Nasdaq losing 33.1%. Existing-home sales declined by 17.8%, the National Association of Realtors reported, with prices still increasing year-on-year but decreasing month-on-month. The Federal Reserve raised rates seven times.
Through it all, however, gold performed admirably well. The World Gold Council reported an 18.1% increase in demand for the yellow metal, propelled by significant central bank demand and increased investment demand. It even managed to eke out a slight price increase, which is impressive, seeing that it faced significant headwinds thanks to a strong dollar.
“Between 1925 and 2020, gold grew at a compound rate of 4.5%, going from $20.62 per ounce to $1,900,” says David Morgan. “Over the long term, gold does one thing better than anything else, preserving wealth.”
Among precious metals, gold is fascinating because its value drivers are primarily financial, as opposed to other metals that might mix it with some industrial uses. Gold is a safe store of value for a myriad of reasons. First, people see it as intrinsically valuable. It’s highly portable. Governments can’t print gold like they print currency.
As part of a diversified portfolio, gold works well because of its negative correlations with the stock market and the dollar’s value. Gold tends to go up in value when the stock markets are down. The same goes for the dollar. Gold won’t earn anyone money the way a real estate investment can, and it’s unlikely to see drastic jumps the way cryptocurrencies have experienced. Still, it won’t expose investors to the same level of risk.
Further diversifying assets might be possible even within a precious metals portion of a diversified portfolio. For example, gold might be the most recognized and coveted of all metals, but it is not the only one with value to consider. Silver, for example, is an interesting choice because it’s used both as an investment and in industry. Likewise, platinum and palladium are primarily industrial metals, but can sometimes offer investment opportunities.
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