Gold's role in the portfolio
05. 02. 2023
Many of us know that saving money properly can help us overcome economic crises and emergencies. Making money work well for us requires a well‑thought‑out plan and a smartly distributed investment portfolio. Today, we're going to talk about some tips on how to think about your investment.
Make your plan
Having a map usually saves us a lot of wrong turns and wandering along the way. It's the same with investing. If you want to put money aside, it's always good to know your reason for saving. Do you want to have a happy retirement? Do you want to become financially independent in 10 years? Or do you want to take a break from work in a few seasons and travel around the world?
All this is good to know before you start investing. First, you will get an idea of when you want to draw down your investment, and second, differently risky or conservative investments are suitable for different distant goals. Last but not least, when you know why you are saving, you will put the money aside with a calmer heart and you will not be so tempted to dip into it.
How about the money?
Do you know why you invest? Great. Now, you need to think about how much money you will put aside. Before you specify the amount, it is good to consider whether your profession is influenced by the so‑called economic cycles. Very simply, whether your source of income may be at risk in the event of economic crises. In this case, allow for a reserve for the downturn. It is true that a dentist will have a relatively stable source of income even in times of crisis, while people will reduce the services of a landscape architect if they have to save money.
A good financial advisor can help you build your portfolio correctly. If you want to be sure that your investment will serve you well, be sure to start with one.
Diversification or the golden rule of thirds
One of the key requirements for an investment portfolio is its security. The key is to limit the risk as much as possible by spreading your money across multiple assets. Be careful, this does not mean depositing part of the money in the shares of one company, the other part in the shares or bonds of another, and the rest in a third company. The golden rule of thirds means spreading your investments among as many independent areas as possible. Financial markets are just one of them. The rule of thirds says that we should invest approximately a third of our money in stocks (and then divide them among several companies), the second third in real estate, and the last third in gold. Sometimes commodities are mentioned, but from a safety point of view, there is a difference in holding commodities physically or in the form of one of the financial instruments (see the first third).
But how much to invest in gold?
It is important to realize that investing in gold is more of a medium to long‑term affair. That's why its ratio in the portfolio will vary depending on why you invest and how the cycle affects your income. For people with a cyclically sensitive source of income, the reserve in gold can significantly help in times of crisis.
According to well‑known strategist Ray Dalio, the yellow metal should represent approximately 7.5% of your portfolio. But there are also investors who recommend a gold share of around 30%. In general, physical gold should not be omitted in any portfolio.
The bottom line: If you want to invest, that's only good. However, it is necessary to think about why, how long and how much money do you want to put aside and to allocate your portfolio correctly between financial market instruments, real estate and physical gold. If you invest 10‑25% of your portfolio in gold, you won't make a dramatic mistake. And remember that you can build the best portfolio with a good financial advisor.