Gold has appealed to investors and consumers for thousands of years. It’s a medium of exchange that shows up in many products and industries.
However, while some people accumulate hoards of gold, others don’t have any exposure to the precious metal. While gold can help any portfolio, most gold investors have a few things in common.
Gold caters to wealthy investors
Investors who are just getting started often gravitate toward stocks. It’s very easy to buy shares of publicly traded corporations, and some of them can deliver excellent returns.
However, most investors shift their goals and mindset as they accumulate more wealth. High-net-worth individuals aren’t only concerned with making more money, but they also want to safeguard the money they have.
Wealthier individuals look for ways to shield their wealth, but maintaining a sizable cash position — rather than having those funds exposed to riskier markets — isn’t the best way to do it. The funds you keep in your bank account gradually lose purchasing power due to inflation.
Realizing this, many high-net-worth individuals allocate some of their funds into gold investments. The precious metal acts as a hedge against inflation and can deliver solid returns during periods of economic and geopolitical uncertainty.
Most gold investors are approaching retirement
Since gold attracts people with higher net worths, it’s no surprise that most gold investors are approaching retirement age. Median net worth jumps from $135,300 for people ages 35–44 to $410,000 for people ages 65–74.
However, this trend also means that people with larger portfolios have fewer working years remaining. Soon, their portfolios will have to cover their living expenses, and investors who are approaching retirement become more risk-averse in order to protect their nest eggs.
So instead of investing in high-upside potential growth stocks, for example, retirees often turn to stable dividend stocks in less volatile sectors as well as precious metals to insulate their wealth. That’s largely because gold is a store of value that has maintained its value for thousands of years, while corporations — and their publicly traded shares — come and go.
Gold usually makes up a small percentage of investors’ portfolios
It’s common for gold investors to dedicate small positions of their portfolios to alternative assets, including gold. It’s never a good idea to overallocate to one asset class, and gold is no exception. Most experts recommend putting 5%-10% of your wealth into alternative assets like gold, depending on your financial goals and risk tolerance.
Gold investors still hold other assets like stocks and real estate, and they still pursue promising growth opportunities. But they also want to establish a financial safety net with more diversification, which is where precious metals — and gold in particular — come into play.
This yellow metal is ideal for intermediate and advanced investors rather than novices. Part of the reason gold appeals to this cohort instead of beginners is the extra work associated with storing and insuring gold. It’s similar to how buying real estate requires more work than buying and holding stocks. In that regard, gold acts as a middle ground since owning the precious metal doesn’t require as much effort as building a real estate portfolio.
Gold investors like stability and prefer to minimize risk
The main draw for gold is its ability to withstand uncertainty while acting as an inflation hedge. The precious metal can deliver enticing returns even during economic cycles that feature sharp sell-offs in stocks and real estate.
Stocks tend to outperform gold in the long run, especially during bull markets. The Dow Jones Industrial Average (DJIA) has comfortably outperformed gold over the past 100 years. That’s also true over the past 30 years. However, gold has outperformed the benchmark over 5-year and 20-year timeframes.
Investors could have earned higher returns with the S&P 500 or the Nasdaq Composite than the DJIA. However, looking back at that 30-year period, gold did outperform stocks in a few of those years. This distinction is just a bonus, as investors primarily buy gold to reduce their risk, but minimizing risk can also occasionally translate into higher returns.
Should you wait to buy gold?
Typically, gold investors have higher net worths and are getting closer to retirement. Younger investors or those who are still building their wealth may look at this information and believe they should hold off on buying gold.
However, the precious metal has a place in many portfolios. Investors who want to minimize risk and still access respectable long-term returns may want to give gold a closer look. It has delivered an annualized 10.2% return over the past 20 years, rewarding patient investors in the process.
The precious metal also acts as a good hedge against economic and geopolitical uncertainties — two scenarios that can hurt stocks and real estate. Gold can make sense for investors of any age or net worth, but it’s important to assess your finances before making a decision.
