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From 2000 to 2011, gold went up 593% and was the best performing asset in the world. Gold’s meteoric rise sucked in many investors, most of whom bought gold near the top of the market.
Since the peak in 2011 gold is down -36% from its highs, leaving many gold investors with a paper loss.
This type of scenario is unfortunately all too common.
The average investor diversifies into different assets, but usually buys those assets only when they burn the brightest – in other words, at the peak of the market.
A better way to invest, whether it be in stocks, bonds, real estate, or gold, is to invest your money strategically.
Bring Some Strategy to Your IRA
In order to avoid the haphazard accumulation of investments like an impulsive hoarder, you need to map out your investment plan in advance.
This is what asset allocation is all about.
Diversification gets investors on the right track, but asset allocation takes the process one step further.
Diversification spreads money across different investment, whereas asset allocation strategically diversifies a portfolio among different asset classes according to a predetermined plan that reflects the investor’s investment philosophy, time horizon, and risk tolerance.
Asset allocation gives investors the opportunity to benefit from changing market cycles, and can help reduce overall portfolio risk by offering a higher degree of diversification.
The theory behind this is that by diversifying among different asset classes, an investment portfolio can be constructed that has less risk than the weighted average of its component parts.
In other words, different asset classes move up and down at different times. Volatility is a risk for every asset class, but when combined with other asset classes the ups and downs of the total portfolio tend to be smoothed out, with less subsequent risk.
Effective diversification depends not only on the number of assets in a portfolio but also on the ways and degrees in which their responses to economic events tend to reinforce, cancel, or neutralize one another. In other words, you want a mix of assets whose movements are not correlated with one another.
There are several ways to achieve an uncorrelated mix of investments that include gold. Here are my recommended gold allocation options when it comes to your IRA…
The Different Gold Allocations
Let's look at these three different allocation strategies:
Strategy #1: Lightly Allocated in Gold
An investor who is lightly allocated in gold would have 5% – 10% of their IRA in gold. This type of investor is highly confident in the near future of our economy, but wants to have at least a small measure of portfolio insurance.
In order to prevent an overweight in stocks or bonds, this type of investor should be looking to allocate lightly in commodities or currencies of financially stable countries.
Strategy #2: Moderately Allocated in Gold
A moderate allocation to gold would be in the range of 15% – 25% of IRA assets. Considering today’s uncertain economic and political outlook, most investors likely fall into this category. The type of investor who is moderately allocated to gold understands the very real risks of investing in today’s environment. This type of investor would like to be able to offset the losses that may occur if inflation heats up and soften the blow from any financial crisis.
Strategy #3: Heavily Weighted in Gold
An IRA that has 30% – 50% of assets in gold would be considered heavily weighted. An investor with such an allocation is committed to the premise that US government debt, Federal Reserve money printing, rising inflation and plummeting dollar will eventually cause financial havoc.
Investors with this heavy allocation to gold should be vigilant in their yearly reallocation because in the event of a runaway gold market, one should make sure to take gold profits off the table. By focusing too much on volatility of individual assets instead of the volatility of the entire portfolio, many people often do not have enough gold exposure for their long-term horizon. Provided that an investor rebalances their allocations each year, a higher percentage of gold in a portfolio has a volatility similar to an all-stocks portfolio, but its returns were appreciably higher.
So, learn from history, and avoid the mistakes of others. Plan your IRA asset allocation before you invest.
Choose one that suits your long-term needs based on the amount of risk you think you can withstand, and make sure you rebalance your portfolio every year to maintain a stable risk exposure. If you would like to learn more about how to invest in metals through your IRA, sign up to receive our exclusive investment newsletter below, it's free!