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By Kendall Little
Edited By Matt Richardson
/ CBS News
If you're thinking about adding gold to your portfolio, it can be helpful to know just how much is right for your goals and long-term financial plan.
One of the best benefits of investing in gold is diversification — a method for reducing your investment risk by holding multiple types of investments, including stocks, bonds, alternative assets like gold and more.
In fact, "investors should consider diversification as the main way to mitigate risk in their portfolios," says Dana Menard, CFP, founder and lead financial planner at Twin Cities Wealth Strategies. It's a way to limit exposure to any one type of asset, he says.
When you have some assets that perform well when others are down, you can reduce some of your portfolio's volatility. As a result, you wouldn't want to put 100% of your money in any single asset class, whether gold, stock, bonds or otherwise.
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How much of your portfolio should you put in gold?
Gold is considered an alternative asset, or an investment type that's not stocks, bonds or cash. Alternative assets can also include other commodities like silver as well as collectibles, real estate and more.
Typically, investors should allocate no more than around 5% to 10% of their portfolios to alternative assets like gold. However, it's always important to take your individual situation and goals into account.
Still, Menard echoes the 5% rule in his recommendation: "The best way to reduce portfolio risk is to diversify as much as possible," he says. "I wouldn't recommend more than 5% of a single holding in a well-diversified portfolio."
Timing may play a part in your decision, too. For example, gold prices have been up significantly this year, as uncertainty continues to plague the economy. For some, that could make now a good time to hedge against other investments that could underperform.
"As inflation continues to run high, this might be an excellent time to increase allocations to gold," Frank Trotter, president at Battle Bank, told CBS News earlier this year. "Over time, analysts have shown that gold has been a good hedge against inflation."
Still, some investors may choose to remain conservative. If diversification is your goal, you don't necessarily need to dedicate a great portion of your holdings to gold.
"A small amount of gold can help in diversifying a portfolio," says Patrick Dinan, CFP, president and founder of Impact Fiduciary. Dinan says his clients hold no more than 2% of their portfolios in gold as a non-correlated alternative asset (meaning it's not correlated with other common investments you may hold, like stocks).
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Should you invest in gold now?
When it comes to investing for the long term, a well-rounded portfolio can help you weather changing economic conditions and periods of uncertainty.
Gold is often seen as a great way to diversify because it tends to act as a safe haven during recessions and its price can often perform inversely to the stock market. There's still a risk, of course; not every year ends with gold prices up, and you could miss out on potential gains from more risky investments.
But for a relatively steady diversification option in today's inflationary climate, it could be a smart choice.
Take your entire portfolio into account before you make any financial decision, though, and allocate the amount that best helps you meet your long-term investing goals. If you're unsure about any new investment option, including gold, consider speaking to a trusted financial advisor, who can help you understand the details of your individual portfolio and financial plan.
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