Should I sock away gold?
The Answer Guy says not. Plus: Why your investment hasn't doubled. (Yet.)
By George Mannes, MONEY Magazine senior writer


NEW YORK (MONEY Magazine) - Q. I want to invest up to $50,000 in gold bullion to hedge against a decline in the dollar's value. What is the best way for me to do this?

-- Linda N., Brooklyn

ANSWER The best way is with extreme caution. Gold casts a hypnotic spell as a symbol of unassailable value in times of crisis. But unless the bad times you're envisioning could devolve into last-chopper-out-of-Saigon-level stuff -- and Brooklyn ain't anywhere near 1970s Saigon, right, Linda? -- there's no need to store gold bricks in the back of a closet.

Just buy shares in an exchange-traded fund that tracks the price of gold, such as StreetTracks Gold Shares (Research). Don't overdo it, though. Gold zoomed past $530 an ounce in December, up 28 percent in five months and reaching prices last seen during Ronald Reagan's presidency, yet gold has been a lousy inflation hedge in recent decades. It generates no income. And it isn't the only protection against a weak or inflated dollar: Alternatives include international stocks and Treasury Inflation-Protected Securities.

Financial planner Allan Roth of Colorado Springs says gold can be useful for diversification but shouldn't exceed 5 percent of your holdings. "If you're investing $50,000 in precious metals, your portfolio should be worth more than $1 million."

Q. I was told in 1999 that money in an S&P 500 index fund would easily double in 7 1/2 years. But 6 1/2 years later, my $10,000 S&P investment is worth only $10,500. Is a CD a better choice?

-- Karen Kurz, Flushing, N.Y.

ANSWER Um, how soon do you need that money?

Over the past 20 years, the total return of Standard & Poor's 500-stock index has averaged 12.2 percent a year. At that rate, your money would have doubled in about six years -- and you would have earned much more than the average 6.2 percent that five-year certificates of deposit have yielded annually since 1984.

But long-term averages don't always translate into short-term forecasts, as you painfully learned after buying into the S&P only months before its peak in 2000. You'll never get a guarantee that, in any single year or set of years, the S&P will achieve its average return or outperform a CD.

So if you need the money soon and can't run the risk of an S&P decline in 2006, park it in a CD, which protects your principal and offers a fixed yield (lately 4.1 percent for a one-year CD). But if you can wait a decade for your money, stick with stocks because it's reasonable to bet they'll regain their traditional lead over CDs. Stay in a low-cost index fund, such as MONEY 65 entry Fidelity Spartan 500 (Research), and be patient. It's no sure thing, but history will be on your side.

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Looking for some answers? MONEY wants your questions about investing. E-mail answer_guy@moneymail.comTop of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.