What Are Some Downsides to Only Having Gold As an Asset?
Gold can be an extremely valuable addition to your portfolio, often serving as an effective hedge against inflation and providing protection from potential financial crises.
However, physical gold investments come with high storage costs and theft risk; plus they do not generate passive income like stocks and bonds do.
1. It’s Not a Currency
Gold may seem like an attractive investment option that offers protection from inflation, but it’s actually not a currency. Unlike bonds or stocks which produce passive income in the form of interest and dividends; instead, gold only yields profits when sold for more money than what was paid up front.
Investors purchasing physical gold should factor in storage and insurance costs as well as potential capital gains taxes when selling their investments, which should not be an issue when planning for long-term strategic asset allocation; this can, however, present disadvantages to shorter-term investors seeking more stable returns. It would be wise if any prospective gold investors consulted a Certified Financial Planner (CFP), who can tailor a portfolio tailored specifically for them and advise how much of it should include gold investments.
2. It’s Highly Speculative
Gold bullion can be one of the many ways of investing in this precious metal. There are also mining companies and exchange-traded funds which specialize in physical bullion holdings as viable strategies.
Investment in any asset class comes with risks, including the possibility of making poor choices. Yet some risks specific to gold can be more pronounced. While gold has traditionally served as a hedge against inflation, its performance has often been highly correlated to equities and other assets.
Gold has its own risks when investing in it; when stocks rally, gold’s value often follows suit and vice versa. Furthermore, unlike stocks which provide investors with dividends as returns on their investment, gold doesn’t provide one at all; rather its worth depends on what people are willing to pay on any given day, making it a highly speculative asset and thus investors should carefully evaluate these risks before adding physical gold into their portfolio. Investing can be expensive due to storage fees and premiums associated with owning physical gold bullion ownership compared with investing digital bullions which also offer no dividends but don’t provide dividends like stocks do – unlike stocks which can give their owners dividends from a capital appreciation on an asset like stocks; in physical gold it can incur storage fees due to storage costs associated with keeping physical gold owned compared with investing digital bullions which gives its owner no dividend return on investment like stocks do due its volatility when investing digital bullion as an asset class itself making investing in physical gold more speculative due to storage costs associated with storage as well as insurance premiums; investors should weigh these risks carefully before considering adding this asset class into their portfolio – while investing physical gold can incur storage and insurance premium costs associated with ownership costs associated with owning physical bullion can costlier due to storage costs and insurance premium costs associated with storage costs associated with owning it as opposed to investing digital bullion or investing digital bullion would cost much less of investing digital bullion does when compared with investing via virtual bullion could costlier due to more costly storage costs associated with owning than investing digital counterpart.
3. It’s Not Part of a Diversified Portfolio
Gold can serve as an asset in a diversified portfolio to reduce risk and provide stability during times of economic instability, but adding it requires several considerations, including storage costs for physical bullion as well as capital gains taxes when sold; furthermore, unlike dividends or interest, gold doesn’t produce passive income and could even be stolen by thieves.
Gold can be hard to time effectively, so many asset allocators choose a small structural allocation as an easy way to diversify during periods of stock market instability. Gold also boasts low correlation to equities so can provide some welcome diversification benefits.
However, it’s important to keep in mind that gold has lagged behind stocks and bonds since 1997; thus increasing allocation doesn’t guarantee increased returns. Before making decisions about investing in gold, investors must carefully consider their risk tolerance and investment horizon in order to ascertain if it fits well into their portfolio; this can be accomplished either through filling out a portfolio assessment form or speaking with an independent financial advisor.
4. It’s Extremely Inefficient
Physical gold investments come with various costs: storage fees, insurance premiums and capital gains taxes when selling. Furthermore, investing in physical gold doesn’t generate passive income sources such as dividends or interest payments that can help your nest egg to expand over time.
Gold-focused portfolios may also not fare well during periods of low interest rates, due to the U.S government being the world’s largest debtor and devoting most of its tax revenue towards interest payments – this restricts how high interest rates can rise without damaging both economy and stock market.
Although a small allocation to gold can help mitigate volatility and diversify your portfolio, it is still wise to carefully weigh all possible outcomes before making your decision. Always seek independent financial advice prior to investing your funds – click here now and request your free investors kit!