Gold investment’s role in a balanced portfolio
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In this video we focus on the crucial function gold performs in a balanced investment portfolio. Specifically, I’ll reveal 7 amazing roles gold investment plays and exactly how you can use gold to enhance long term returns and provide portfolio insurance.
1. Reduces inflation risk
While different assets can provide varying returns in your portfolio, inflation always needs to be factored in. In other words, if an equity fund returns 5% year on year but inflation is at 3%, then your money has only really grown by 2%. Some assets like bonds have fixed returns, meaning their actual return after inflation can even be negative if inflation rises. This is certainly true of cash which may return around 1% in the bank while inflation stands close to 3%.
2. Currency hedge
With traditional currencies such as the Dollar,Sterling and the Euro coming under continued pressure, seeking protection from devaluation is essential. In the UK, it’s likely most investors will hold assets based in Sterling. With events such as Brexit, political instability and mounting national debt, every asset within the portfolio can be exposed to a fall in Sterling’s value.
Owning gold in the portfolio protects against a weak Pound. In fact, as Sterling weakens, the value of your gold rises, regardless of the underlying gold price. Read our study Gold v Paper Money.
Gold is globally recognised and liquid, especially if you own bullion coins or bars. Not only can gold be converted back into cash quickly anywhere around the world, but it can also be sold in small quantities, enabling flexibility to liquidate part of your holding.
This high degree of liquidity enables the adventurous investor to combine gold investment with less liquid assets such as property and fine wine. Read our analysis or gold investment versus property.
4. Balance and portfolio insurance
A majority of a balanced portfolio’s assets are dependent on a strong economy to perform well. Stocks and property prices will perform well when an economy is thriving. 2008 was a stark reminder that when the global economy breaks, all your assets can fall in value at the same time. Gold is known as a safe haven asset, meaning it has a particular appeal to investors in times of economic uncertainty. This increased demand, in turn, pushes up its price.
So owning some gold alongside the other economy-dependent assets spreads investment risk in a unique way so that even in a recession, your portfolio value is protected. The majority of independent financial advisors would always advise investors to seek a balanced portfolio of investments.
5. Tax efficiency
Tax plays a crucial role in calculating your investment returns. Tax is applied to income on cash in the bank and dividends on shares. It is deducted from gains made on assets appreciating. So what can seem like a strong performing asset, can actually underperform once the tax is deducted.
There are various ways that gold investment can be completely tax free. Gold bullion, for example, qualifies for a UK SIPP pension. That means you get tax relief off your purchase price and any gains made are completely protected from tax.
You can even achieve tax efficiency with gold investing outside of your pension. Investment grade gold is VAT exempt to buy in the UK, while UK legal tender gold coins are also free from Capital Gains Tax.
6. Reduces volatility
Predicting returns on investment can be difficult, especially when your portfolio consists of a multitude of assets. Assets with variable returns like shares and gold can enjoy periods of high appreciation, but also phases of depreciation. This can impact planning. For instance, your portfolio may be worth £100k and you plan to retire in 5 years based on your expectations for its performance. If in that period, there’s a stock market crash, then your portfolio can fall in value by 30%, leaving your plans in tatters.
By owning a percentage of gold in your investment portfolio, it actually reduces the overall volatility of its overall value. If stocks and property fall in value, gold is likely to rise. This irons out volatility and enables a more predictable performance.
7. No counterparty risk
Owning bonds, stocks and even cash, essentially amounts to owning pieces of paper with the promise of value. History has demonstrated that this perceived value can fall to zero overnight. This happens if a company goes bust as Lehman Brothers did, a Government defaults on its bond repayments or there’s a run on a currency.
Focusing on physical gold bars and coins reduces this exposure to counterparty risk. Holding the real thing enables you to own a tangible asset with intrinsic value. In a growing digital age, where stock values are increasingly based on future potential rather than profits and the threat from cybercrime, physical gold provides a simple comfort in a complicated world.
If you’ve enjoyed today’s video, please feel free see all 20 of our video guides in the series.
Add balance to your portfolio with Physical Gold
If you’d like to discuss how best gold coins or bars can provide a great balance to your finances, call 020 7060 9992 to speak to a member of our knowledgable team.