How to Help Recession‑Proof Your Retirement Portfolio With Gold (and When to Hold Off)
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The potential of a recession can cause investors to panic. But having a diversified portfolio offers you some protection during economic downturns.
Some people turn to gold to help "recession-proof" their portfolios, since the precious metal is often considered a safe haven investment. It’s certainly not the only tool available for protecting your portfolio against the ups and downs of the market that recessions can cause, but it is a valuable resource.
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How gold has behaved during past downturns
Gold doesn’t behave the same in every downturn, but it often performs differently from stocks. For instance, gold was a big winner during the Great Recession, rising from $700 per ounce in 2007 to $1,000 per ounce in 2009. Stocks, on the other hand, experienced a now-famous crash.
Gold can zig when stocks zag, which reduces an investor’s exposure to the volatility of the stock market. While retirees can diversify into several stocks and funds, they may still lose value if the broader market declines. That doesn’t always happen with gold.
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When adding gold can help your portfolio
Adding some gold to your portfolio can be useful if you have significant exposure to stocks. Gold can minimize your downside during recessions and market corrections while keeping your stock portfolio intact. It’s also a useful resource if you have a lengthy time horizon before retirement or have plenty of extra cash to cover everyday expenses.
Just because gold makes sense for your portfolio doesn’t mean you have to rush into it. Most experts suggest small, strategic allocations tied to a broader plan. Investing at least $100 per month in gold, for instance, lets you grow your position over time instead of taking dramatic actions with your existing portfolio.
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When to hold off on gold
Although gold offers many perks, it’s not the right asset for everyone. Diversifying into precious metals can do you more harm than good if you do not have short-term assets that can provide cash. These buffers — bonds, certificates of deposit (CDs) and high-yield savings accounts, for instance — ensure you have cash to cover your short-term needs while you invest in growth-oriented assets like stocks and gold.
Gold may also be a poor choice if you don’t have an emergency fund or you have debt. Investors should address high-interest debt especially, like credit card debt, before putting money into assets like gold. Financial advisors typically recommend having an emergency fund that can cover your expenses for at least three to six months.
Young investors who have long time horizons may also want to focus on more growth-oriented assets, like stocks.
Investors who are just getting started with gold may want to hold off on physical precious metals. The fees tend to be higher and the process is more complex than simply buying an exchange-traded fund (ETF) that gives you direct exposure to gold.
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Building a recession playbook with gold
A recession playbook becomes more valuable as you get closer to retirement. As people get older, they tend to value low-volatility portfolios that can generate income.
Gold is one hedge you can use to combat market uncertainty, but there are other reliable assets to consider. Cash is the safest, but it will gradually lose purchasing power due to inflation. You can store money in a high-yield savings account and invest in bonds and dividend stocks to minimize inflation’s impact on your portfolio. Bonds and CDs also let you lock in a low-risk annual percentage yield (APY) on your money.
The best recession-proofing involves a coherent plan, instead of a single product or letting your emotions guide your investing decisions.