If you’re looking for safety in your portfolio, gold isn’t the answer

Q. How safe or wise is it to invest some savings in gold? Many of my friends say it’s a great inflation hedge. But I have a very well-diversified portfolio that’s mainly equity index funds right now. Is having a small portion of gold, say 5% or 10%, a good option? Why or why not?

— Thanks, Mary R.

A. I love my friends. I ask them for advice on all sorts of things. Like how to peel butternut squash without losing a finger, or how to gel my daughter’s hair for her synchronized swimming competitions. (Knox Gelatin, for the record). But unless we are talking about one of my friends who works full time as a portfolio manager in the investment industry, I don’t ask my friends for investing advice.

Your question is best directed to an advisor who can look at your complete financial picture. And I bet that before she recommends you buy gold, she’ll want to talk more about your fixed income position and whether or not you need some to balance out your equity.

But you didn’t ask me to opine on your friendships. You asked me about gold. Sure, it has long been viewed as a great inflation hedge. Certainly thinking about how to ensure that your 85-year-old self can afford a double-double a few decades from now is important. But is gold the best way to do that? I’m not convinced.

If you look at a long-term chart you’ll see just how volatile gold has been over the last twenty years. And gold producers themselves have had an even more stomach-churning ride. If you’re looking for relative safety, I’d go back to my earlier reference to fixed income.

You already have a diversified portfolio of low-cost equity funds. Adding gold into the mix will add a level complexity to your portfolio that I’m not sure you need.  So, instead of a bottom-up question about adding gold, I’d look at the top-down question about whether your portfolio as currently constructed will deliver on your goals.   There are lots of tweaks that you might want to make—say, more fixed income, more international exposure, fewer tech stocks. That portfolio review is gold.


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