Should I invest my retirement savings in gold?

Secrets of a dream retirement
Secrets of a dream retirement

Is there a good reason I ought to include gold in my retirement portfolio? -- Brian

Traditionally, there have been several rationales for including gold in a portfolio. Perhaps the one most often cited is that gold can provide a hedge against a jump in inflation. But while gold does indeed do a pretty decent job of tracking changes in the inflation rate, this Vanguard report shows that short-term TIPS, or Treasury Inflation-Protected Securities, do a better job of hedging against inflation with much less volatility. So if it's inflation protection you want, you can probably get it without gold's roller coaster-like price gyrations by investing in short-term TIPS (or more likely a fund that invests in TIPS).

Another reason many people turn to gold is because they're looking for a safe haven in times of political or economic uncertainty. Back in 2011, for example, when fears that Greece and several other European nations might default on their debt sent stock U.S. prices tumbling by almost 20%, the price of gold gained more than 30%, jumping from just over $1,400 an ounce to nearly $1,900. After the European debt crisis passed, however, the price of gold retreated and recently sat below $1,300 an ounce, or more than 30% less than what panicky investors paid five and a half years ago.

Of course, gold prices could soar again if, say, tensions continue to build between the U.S. and Syria or investors begin to feel more uncertain about the economy's prospects under a Trump administration. But the pop that gold experiences in time of turmoil and uncertainty tends to be temporary -- and people who rush into gold seeking shelter can later find themselves nursing losses.

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Finally, some people are drawn to gold because, unlike the stock market, they see it as solid and tangible, an investment they feel they can count on to hold its value. But this makes no sense on the face of it. Gold prices are as volatile as stock prices, if not more so.

So if you're looking for a place to put money you really need to maintain its value at all times (an emergency fund, a down payment for a house you plan to buy soon, cash to cover a year or two's worth of retirement living expenses beyond what Social Security will cover) then gold is a terrible fit. The money that absolutely, positively must be there when you need it belongs in cash equivalents like savings accounts, CDs or money-market funds, not gold.

That said, I suppose you could make a case for investing a small portion of your retirement savings -- or any money you're investing for the long-term in gold -- provided you go about it the right way. By which I mean investing, say, 5% to 10% of your portfolio to gold and invest the rest in a diversified portfolio of stocks and bonds. Essentially, gold becomes another asset class in your portfolio, adding a bit more diversification. To make this approach work, however, you must periodically rebalance your portfolio so that your gold holdings remain the same percentage of your overall holdings that you originally set.

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As a practical matter, this means you'll have to be a bit of a contrarian in your gold investing. When your fellow investors are piling into gold and driving up its price because they fear a spike in inflation or are concerned about some economic crisis or geopolitical kerfuffle, you'll more likely to sell than buy. The opposite is true when gold is out of favor and its price is on the skids. You're more likely to be a buyer than seller. If you don't have the discipline or the stomach to do this -- and many people don't because it means going against the instinct to follow the herd -- then this approach isn't for you.

If you decide it is, however, then you'll probably find it easiest to pull off this strategy by investing in a gold ETF, such as iShares Gold Trust or SPDR Gold Share, both of which hold physical gold and can be held in a regular taxable account or in a tax-advantaged retirement account such as an IRA. For more on regulations on owning gold within an IRA as well as some special tax issues surrounding gold, see this article in the Journal of Accountancy titled "Tax-Efficient Investing In Gold."

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Just to be clear, though. I don't think you need to include gold in your portfolio, or for that matter, any of the other alternative or niche investments many advisers tout these days. On the contrary, I think you're better off just sticking to a straightforward portfolio of low-cost stock and bond funds, preferably broadly diversified index funds that reflects your risk tolerance and financial goals. (For guidance on how to create such a portfolio, complete this 11-question risk tolerance-asset allocation questionnaire.

There are not guarantees when it comes to returns, of course. But history has shown that a simple mix low-cost stock and bond funds has been able generate sufficient returns in excess of inflation to maintain the purchasing power of your savings over the long term. And if you feel you need short-term protection against occasional upticks in inflation, you can always invest a portion of your bond stake in TIPS.

To sum up, I don't really see a compelling case for including gold (or other precious metals) in an otherwise diversified portfolio. But if you feel your portfolio just has to have a bit of glitter, then at least make gold part of a disciplined long-term asset allocation strategy, not an investment you rush to when fear and uncertainty are running high.