For some investors, gold is the all-purpose life preserver. Stocks are slumping? Buy gold. Nervous over a sluggish economy? Go for the gold. Worried about Europe’s sovereign debt crisis? Stack up the bullion. Yet, gold may not be the right
For some investors, gold is the all-purpose life preserver. Stocks are slumping? Buy gold. Nervous over a sluggish economy? Go for the gold. Worried about Europe’s sovereign debt crisis? Stack up the bullion. Yet, gold may not be the right choice for you, so you’ll want to know what you’re getting into before you invest.
Of course, the lure of gold is undeniable. Throughout history, gold has been perceived as having great intrinsic value. But as an investment possibility, gold has some “scratches” to it. First of all, contrary to popular belief, gold prices do not always go up; instead, they will fluctuate, sometimes greatly.
Furthermore, you will face specific risks with every type of investment in gold. If you bought a gold futures contract (an obligation to buy gold at a predetermined future date and price), you could lose money if gold falls, because you’ll still be obligated to complete your contract at the higher, agreed-upon price. If you purchased physical gold, in the form of coins, bullion or bars, you’d face storage, security, insurance and liquidity issues.
As an alternative, you could buy shares of stock in gold mining companies, but you need to do a lot of research beforehand, because some of these companies may still be in the gold-exploring stage — and there’s no guarantee that their explorations will lead to profitable discoveries.
Also, even when its price is considerably lower than it is today, gold is still a fairly expensive investment compared to other choices. For relatively modest amounts, you can buy a few shares of quality stocks.
You can also purchase bonds, Certificates of Deposit (CDs) and government securities without having to write enormous checks. But it’s pretty costly to go into the gold futures market. And you’ll likely have to spend thousands of dollars, if you want to buy a bar of gold or even a bunch of coins.
Given these drawbacks to investing in gold, what can you do to fight back against market volatility? Your best bet is to diversify your holdings among stocks, bonds and other investments.
Market downturns often affect one type of asset more than another, so if you can spread your dollars among a variety of asset classes, you can help blunt the effects of volatility. Keep in mind, though, that diversification, by itself, cannot guarantee profits or protect against losses.
In coping with volatility, you’ll also help yourself by taking a long-term view of your investments’ performance. If you look at your investment statement for a given month, you might not like what you see. But step back and examine your portfolio’s performance for the last five or 10 years.
If you own a diversified portfolio of quality investments, the chances are reasonably good that, over the long term, your results will be more positive and less volatile than what you might see over the course of a few “down” months.
So try to avoid the allure of gold as a “quick fix” to whatever seems to be ailing the financial markets at a particular time. Other investments may be less glitzy and glamorous than gold, but they have their own sparkle.
• This article was written by Edward Jones for use by your local Edward Jones financial advisor, Rob Lansdell. He may be reached at 332-7469 or by email at rob.lansdell@edwardjones.com.
