Once you’ve decided to buy some gold or silver, a common question to then ask is: How much should I invest In precious metals?
Or put another way, what percentage of gold (and silver) should be in my portfolio?
A reader posed just such a question recently:
“I have a balanced portfolio of $2.5 m spread across dividend earning stocks (500k) bonds and notes (400k) fixed deposits (400k) and the balance in residential properties.
Do I really need to have some protection with gold?
If so how much?”
He accepted we were not financial advisors but was interested in what percentage of our own liquid assets were in gold and silver.
We do believe everyone should have some gold bullion as financial insurance. See this post for 5 reasons to hold gold as wealth insurance: Why Gold Bullion is Your Financial Insurance
But just what percentage of your liquid assets should be in gold and silver is a very specific and individual question to answer.
How Much Gold is Enough Comes Down to Many Personal Factors Including:
- What other investments you hold?
- What the level of risk and volatility is in your portfolio?
- How much income do you require from your investments?
- How much liquidity do you require?
- How long do you intend to hold your precious metals for?
- The level of risk for a major financial crisis in your home country and globally.
Gold and silver offer the benefits of diversification and are inversely correlated to many other assets. That is, when your other investments are falling gold may well be rising. As it did in 2008 when gold was the only asset class to end the year higher than it began.
What Percentage of Gold Should Be in My Portfolio?
There are studies to back up the above assertions. These studies prove the benefits of gold allocation at different percentages of your portfolio.
Gold is a Non-Correlated Asset
Research shows that gold acts as “investment insurance” as it is an asset that is non correlated with many other assets. So when the likes of shares/stocks, bonds and property are performing poorly gold can often smooth out your overall returns. Many studies have proven gold’s counter cyclical qualities:
“Gold’s qualities as a hedging instrument and safe haven asset have been thoroughly examined in recent years. Sherman (1982) suggested a weighting of 5% in an equity portfolio resulted in lower risk and higher return.
…Studies by Bruno and Chincarini suggest allocating 10% of the portfolio to gold for non-US investors. Scherer recommends a 5-10% weighting of gold for sovereign wealth funds. For high net worth individuals and family offices, Klement and Longchamp (2010)suggest an allocation in the range of 5% to 10% by weight to gold in an equity portfolio.
Lucey, Poti et al. (2006) examine portfolio choice where the investor is concerned with downside protection and find an optimal weight of between 6% to 25%, depending on the time period and the other assets included. Baur and Lucey (2010) provided the first statistical test of when gold acts as a safe haven and when as a hedge.”Source.
Holding Gold Can Reduce Losses in Financial Crises
The prices of most assets fall in a financial crisis. Instead of suffering though these major draw downs, a holding of gold could reduce these falls considerably.
One study showed that holding 10% gold reduced losses in the worst year of the financial crisis, but only reduced annual returns over a 40 year period by 0.1%:
On a retirement portfolio of $1 million, adding 10% gold would have reduced losses during the worst year of the financial crisis by more than $17,000. During the Tech Stock Crash, holding 10% gold as “investment insurance” would have boosted a US portfolio’s total returns by almost 0.7 percentage points per annum, adding nearly $40,000 to initial savings of $1m.
…Over the four decades ending 2016, the total return on a portfolio with 10% gold would have shown compound annual growth of 9.7%. That was just 0.1 percentage points per year below the total annual returns of a portfolio holding 60:40 stocks-to-bonds with no gold.
Indeed, in the best single year for US equities and bonds (1995), keeping 10% of a portfolio in gold would have only reduced total returns from 32.2% to 29.1%.Source.
So holding a percentage of your portfolio in physical gold would not significantly affect your overall returns of a 60% shares / 40% bonds portfolio.. But it would reduce the losses in times of crisis.
The above studies vary in the percentage allocation to gold of between 5 and 25%, Most commonly 5-10% of your liquid assets (that is excluding property/real estate) in gold is recommended.
But the permanent portfolio made famous by Harry Browne says 25% gold. Along with 25% cash, 25% long term bonds, 25% stocks. You can learn more about the permanent portfolio – a set and forget method of investing – here.
Other Factors to Consider When Deciding How Much Gold Should You Own?
1. Are Your Investments Mostly in Real Estate?
Most New Zealanders only own residential property. Maybe along with a small Kiwisaver investment and the odd share. But residential real estate is likely to make up the vast majority of most Kiwis investments. So in this case, perhaps you should have a higher percentage of gold. Due to golds liquidity in comparison to the illiquidity of real estate.
2. Will You Rebalance Your Allocation to Gold and Silver?
Your percentage allocation to gold may also change as the price of gold and silver and you other investments rise or fall. So you should consider whether to rebalance your percentage.
3. Your Aim in Holding Gold and Silver May Affect Your Weighting to Precious Metals
But along with diversification and insurance properties, we think gold currently likely has some upside. It is undervalued against other assets currently. See this comparing gold to shares and housing: Gold Ratios Update: Dow/Gold, NZ Housing to Gold, & Gold/Silver Ratio
While this post guesses at some possible future values for gold: How Do You Value Gold | What Price Could Gold Reach?
So depending on your aims (wealth protection vs wealth creation), you may choose a higher allocation.
You may consider own a small percentage of precious metals purely as insurance (5-10%). This would likely be a permanent holding that you don’t ever intent to divest. While you own a larger portion to spend (a.k.a sell) as gold rises. That is, a percentage as wealth protection/insurance versus a larger percentage aimed at wealth building.
How Much Gold is Enough – Do Your Due Diligence & Make Up Your Own Mind
Asking a bullion dealer “how much gold should I own?”, is much like asking a real estate agent should I buy a house or a stock broker should I buy some shares!
Each has their own bias. It’s important to do your own due diligence.
We can almost guarantee your financial advisor will not recommend you buy any bullion. But then again they don’t make any money out of a gold transaction either! So that’s why it pays to do your own research and make up your own mind. After all everyone (including us!) will be pushing their own barrow.
Each persons circumstances are different. So take into account all of the information above, along with your own situation and portfolio. Then make up your own mind.
Once you decide what percentage precious metals allocation to have, we’d recommend you go with physical gold and silver for your financial insurance.
As there are some very definite differences between physical gold bullion and other “paper” gold products too. So be sure to read this article if you haven’t already: Paper Gold vs Physical Gold – What Should You Buy?
Check this out to help you decide between gold and silver: Should I Buy Gold or Silver? 7 Factors to Consider in Gold vs Silver.