Properly managing your investment portfolio over time is crucial to enjoying a comfortable retirement. Why is that? Because your investment portfolio, which is the total of all your investments in different assets, provides you with the income you need to sustain your lifestyle after retirement.
This is primarily why many people consider investing in different traditional assets like stocks, real estate, etc., during their working years.
Although these investment options have been around for years, adding gold and other precious metals to the mix is equally as important as investing in these assets. You might wonder, ‘Why should I invest in precious metals at all?’
After spending over two decades working in this industry, I have realized the importance and benefits of diversifying my retirement portfolio with precious metals. To help you understand the same, this article will take you through everything related to precious metals investment to attain a stable financial future after retirement.
The Importance of Diversification
Considering my extensive experience in this industry, diversification of investments is analogous to the saying, "Don't put all of your eggs in one basket." You can achieve diversification by utilizing asset allocation across your investing portfolio. Diversifying your portfolio means investing in various assets catering to your short-term and long-term investment goals.
But why is it important? During my early investment years, I had the same question popping into my head frequently. Fortunately, after thorough research and experience of investing in various assets, I realized how each form of investment performs differently under different economic and market conditions. As a result, when the value of one asset goes down, the other asset’s value remains stable, limiting the overall loss.
Traditional Retirement Portfolio Components
With investments being an age-old approach to secure one’s finances for years to come, many traditional assets are known to be effective additions to one’s retirement portfolio. These include:
- Stocks
- Mutual funds
- Real estate, etc.
Although these investment options have been well-known and considered for decades, their associated risks and limitations, such as market volatility, inflation, exploitative interest rates, and limited liquidity, make them less appealing as investment choices in today's landscape. Therefore, if you're looking to enhance the value of your retirement portfolio, I recommend considering investments in assets like precious metals, which have been gaining in popularity and demand.
What Are Precious Metals?
You might be confused with this term if you’re new to the precious metals investment market. But trust me, we’re all familiar with what precious metals are, i.e., popular metals like gold, silver, platinum and palladium. To be precise, these are rare and precious metallic elements with considerable economic worth. What adds to the value of these precious metals is their industrial usage, scarcity, and monetary storage.
Although these precious metals are not new terms for anyone, you might wonder why they are an ideal addition to your retirement portfolio. The answer: their historical growth proves that these assets have been, and continue to be, high in demand and value, especially compared to other assets.
As an example of their historical growth, the yearly average gold price rose to about 1,770 U.S. dollars per troy ounce in 2020. This rise in demand was caused by political uncertainty in the US and trade concerns with China.
However, this is only one example of how the value of precious metals, even in times of economic challenges, has consistently increased. This means that precious metals are a time-tested investment option with a constantly growing market demand and value.
Benefits of Including Gold
Gold is the top choice for many investors among precious metals due to its high demand and constant media coverage. But the reason I suggest adding gold to your retirement portfolio is because — from my own experience — it offers various benefits, including:
Liquidity
Since gold is one of the most in-demand precious metals with wide applications globally, it has a higher liquidity compared to other investment options. Speaking from experience, unlike other assets I hold, I have always found it easier to sell gold at the current market price. So, as long as I have gold, I am certain that I can liquidate it at any time.
Inflation
If the returns on stocks or real estate are declining or expected to decline in the future due to inflation, it’s advantageous to include gold in your retirement portfolio. Gold tends to maintain stability even when other investment markets are affected by economic crises.
Wealth Preservation
Historically, people have often stockpiled gold during times of war and political turmoil. What I’ve come to realize after holding gold, is that this enduring asset is a powerful tool for preserving wealth over the long term. For instance, the gold I purchased two decades ago still holds its value. This preserved wealth provides me with a safety net, allowing me to achieve financial stability during challenging times by selling my gold if needed.
Low Correlation with Traditional Asset Classes
Another notable benefit of holding gold in my retirement portfolio is its limited correlation with other traditional assets. So, as I mentioned earlier, even when one or more traditional assets, like stocks or real estate, decline in their respective market, gold will continue to maintain a stable value.
Benefits of Including Other Precious Metals
Apart from gold, other precious metals like silver, platinum, and palladium also bring along a fair share of benefits to your investment portfolio. What are they? Let’s take a look:
Silver
According to Statistica, the global jewelry industry accounted for 234.1 million ounces of global silver demand in 2022. That accounted for 18.8% of total global silver demand that year. But that’s regarding only a single industry with a consistently growing demand for silver.
Apart from the jewelry industry, MarketWatch studies show that the industrial use of silver grew 9% to an all-time high of 508.2 million ounces in 2021. This historical growth in silver’s demand — which continues to increase even now — proves that silver will never be a forgotten asset, adding to its solid growth potential for years to come.
Palladium and Platinum
Palladium and platinum are additional precious metals with a rapidly growing market demand, making them ideal investment options. These are two platinum group metals (PGMs) with various industry, technology, and jewelry applications. Notably, platinum and palladium are used in the production of:
- Catalytic converters
- Fuel cells
- Electronics
- Dentistry
- Medicine, etc.
Besides their wide usage, these metals are extremely scarce, with a high chance of future supply interruption. This means there’s a huge possibility for precious metals like palladium and platinum to have limited availability in the future.
Now, the lack of availability of precious metals widely used in various industries will gradually add to the value and demand for platinum and palladium. As a result, owning these metals in your retirement portfolio will help increase the chances of profitable returns when you’re ready to sell these assets.
Why is it important to diversify your Portfolio with Precious Metals?
Considering the above-mentioned benefits of investing in different precious metals, it is evident that each asset introduces different investment benefits altogether. Speaking of which, the best way you can maximize your investment returns in the precious metals industry is by adding not one but multiple precious metals to your portfolio.
Of course, the assets you choose to invest in should meet your financial requirements and investment goals. Below, I will further discuss the different precious metals investment options you can consider to diversify your portfolio.
How to Add Precious Metals to Your Portfolio?
To add precious metals to your portfolio effectively, understand your investment goals and limitations. After years of exploration, I've identified categories that cater to various investment needs, including:
Physical Metals
Physical metals like coins, bars, and bullion are a great way to attain financial stability amidst a struggling economy or personal crises. Moreover, owning precious metals in a physical form helps safeguard your hard-earned finances and opens doors for profitable returns in the future. After all, precious metals are one of the best-performing asset classes known to retain their value (if not increase over time).
Financial Products
Common precious metals investments include financial products such as mutual funds, mining stocks, and digital gold. Your choice among these depends on your objectives, risk tolerance, and preferences. Mutual funds can offer larger returns over time, while options like digital gold are accessible even with a limited budget.
For example, when I started my investment journey, I had limited funds and no experience. I decided to invest in a gold ETF, which was more affordable than physical gold investment and easier to trade than other tradable investments. Investing in a financial product is easier once you understand your financial position and investment goals.
Gold and Precious Metal IRAs
A precious metals IRA is indeed a valuable option for diversifying your retirement investments, particularly by incorporating precious metals like gold. This diversification can assist in mitigating the effects of inflation, currency changes, and stock market volatility.
Moreover, during economic downturns, it adds an extra layer of security. A gold IRA is also an excellent method to diversify your portfolio because it brings limited storage and security concerns.
Since a secure and dependable depository ensures the security and maintenance of your precious metals in an IRA, you don’t have to stress about storage, upkeep, and security. As a result, you can rest assured that you have additional precious metals in your IRA account that can be liquidated in the future.
Risks and Considerations
Even though there are endless benefits to investing in precious metals, these assets also come with various risks that should be considered beforehand. Let’s take a look at these risks below:
Volatility of Precious Metals
My experience of investing in the precious metals industry over the past two decades has exposed me to the price volatility of these assets.
Now, changes in the economy, investor demand, Federal Reserve policy, mining supplies, and inflation are all factors that can influence precious metals prices. Hence, make sure to consider the price stability of the precious metals you want to add to your portfolio before proceeding with the investment.
Storage and Security
When you store precious metals in a safe deposit box or bank vault, you put your assets in danger of theft, loss, or becoming entangled in the banking system. To reduce storage risk, ensure that your gold or silver custodian provides full FDIC insurance on metals kept in their possession.
Also, choose a precious metals vendor with an IRS-approved third-party nonbank trustee. This is only to ensure the security of your precious metals at a third-party depository. In contrast, if you choose to store your assets at home, I always suggest having your assets insured and informing as few people as possible about the asset’s storage location.
Regulatory Considerations
Regulatory considerations are another notable risk that shouldn’t be overlooked. This includes complying with the governmental laws for precious metals investments, including:
- Anti-money laundering procedures.
- Requirements related to the purity of metals you can purchase.
- Taxation
- Reporting requirements.
- Market rules.
Speaking from personal experience, if you do not follow these rules, you could risk penalties, fines, or legal action from the authorities.
Historical Performance of Precious Metals
As mentioned earlier, the value of precious metals like gold has seen a frequent surge. Known as some of the best investment options for decades, gold and other metals like silver, platinum, and palladium have grown in their real-world application and market value.
As an example, Statistica reported that China, the world's top metal producer, generated around 380 metric tons of gold in 2020. Despite a drop in metal demand due to the COVID-19 health crisis, this production output remained consistent compared to 2019. In fact, China was believed to have roughly 2,000 metric tons of gold mining reserves in the same year, nearing Australia's total gold reserve of around 10,000 metric tons.
Other than gold — silver, platinum, and palladium have performed exceptionally well over the years. To illustrate, the average rate of return for silver has exceeded 20% due to the growth in spot prices from 2001 to the present. Over the last 16 years, Silver prices have climbed by an average of 12.4%. Likewise, the historical average rate of return for palladium is 8.6 percent, with a 10-year maximum return rate over 28%. These increases in the different precious metals' value, increasing their return rates for investors, prove the consistent growth of these metals over the years.Frequently Asked Questions (FAQs)
The share of precious metals you should add to your portfolio depends entirely on your investment goals and risk tolerance. However, from a professional point of view, I personally hold 5%-15% of precious metals in my portfolio. The only reason I don’t allocate more than 15% is the limited possibilities of returns through such investments compared to other asset classes.
Gold is useful for diversification since it protects you against losses and hedges against inflation while reducing the risk of losses during market volatility or economic slowdowns.
You can sell your precious metals by finding potential buyers on one of the following platforms:
- The vendor/company from where you purchased the precious metals.
- Online marketplaces
- Third-party companies that buy back precious metals at good rates
- Local gold/silver jewelry or precious metals coin shops
- Auctions and sales
Conclusion
From mitigating significant losses resulting from investing in correlated assets to capitalizing on market demand and value, investing in precious metals offers a range of benefits.
Hence, you can never go wrong with your retirement plan if you diversify your portfolio with the right precious metals investments that cater to your goals.
Just make sure to consider the risks and limitations of every type of precious metals investment that you consider, and only proceed with it if it caters to your limitations and goals accordingly. To see the best precious metals companies click here. If you are interested in gold specifically, see my article on the best Gold IRAs.