Should I Move Some of My $650k from Stocks to Precious Metals?

My total investment value is approximately $650,000, mostly in stocks. Should I keep a percentage of my portfolio in precious metals?

– Rex

Investing a portion of a portfolio in precious metals is a common practice. If you keep the allocation modest – around 5% – I think it’s okay to use precious metals for peace of mind. That said, they’re not a necessity. It’s worth exploring why you’re drawn to precious metals in the first place. There may be more effective ways to address your concerns.

A financial advisor can help you decide which types of assets belong in your portfolio. Connect with an advisor today.

I’m taking a little bit of a leap here to assume one of the following reasons is why you’re considering precious metals. Most people consider precious metals because they are looking for diversification, protection from inflation, or a safe asset. Let’s address each of these.

Precious metals can increase diversification in your portfolio. Since precious metals don’t track the stock market closely, they can help reduce overall portfolio volatility. The 2008 financial crisis was a good example. The S&P 500 fell by 50% between December 2007 and February 2009, while gold was up more than 17% during that same span.

However, we don’t need to read too much into one example, and this is not unique to precious metals. Any asset with different risk-return characteristics can add some level of diversification. You might also consider adding bonds, CDs or annuities. These will likely offer better diversification for less total volatility. They also offer a stream of income, unlike precious metals.

(And if you need more help finding ways to diversify your portfolio, consider working with a financial advisor.)

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Inflation protection is another major reason investors hold precious metals, particularly gold. However, the connection between precious metals and inflation isn’t quite what most people believe. The relationship is very weak over short periods of time. You can see this by comparing the percentage change in the price of gold for one year, with inflation in the same year. Gold prices rarely move in step with year-to-year inflation.

While the long-term relationship is stronger, it doesn’t offer much value for people planning over typical timeframes. I’m a very optimistic person, but I don’t base my plans on 100-year timelines.

Again, a better tool to specifically address short-run inflation concerns might be Treasury Inflation-Protected Securities (TIPS) or I-bonds. (If you’re worried about inflation’s impact on your portfolio and financial plan, speak with a financial advisor about ways to protect yourself.)

Many investors view precious metals as safe haven investments during periods of volatility. There are certainly times in history when precious metals have held their value during troubled times. However, that isn’t always the case and again, the short-run details matter.

For example, the S&P 500 was down nearly 20% in 2022. Gold dropped by nearly 9% at one point in 2022 but ended the year roughly flat. How would you have felt watching your “safe” asset decline more than 8%? I’m not suggesting that you should have been worried. I’m acknowledging that most people would have been frustrated if they bought gold expecting that it would “hold its value.”

A safe asset should also be stable, but precious metals can be highly volatile. However, the price of precious metals can in fact be quite volatile. Over 10 years, the standard deviation of iShares Silver Trust (SLV) is nearly 27%, compared to 15% for Vanguard’s S&P 500 ETF (VOO). Savings vehicles such as a high-yield savings account or certificates of deposit (CDs) would be a much better option for protecting assets during short-run turmoil.

(If you need help finding financial advice, connect with a financial advisor who serves your area using this free matching tool.)

Precious metals can add diversification, but they aren’t a must-have for every investor. There are other, perhaps better, ways to get most of the purported benefits of precious metals. Precious metals don’t represent ownership or debt in a company that generates revenue, unlike stocks or bonds. You buy precious metals on the simple hope that someone else will pay you more for it later.

However, there is often an immense psychological factor involved. Because the common story is that precious metals are safe, hold their value and protect you from inflation, many people simply feel good about holding them. If keeping a small percentage of your investments in precious metals puts you at ease without jeopardizing your goals, then it may be something to consider.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.

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