Where and how much to invest is a critical aspect of the asset allocation strategy in a portfolio. It is about allocating your money to different asset classes, like equity, debt, real estate, gold, etc. Your asset allocation determines the overall strength of your investment portfolio, which is critical in long-term financial planning, especially for post-retirement goals.
However, gold assets hold a unique place in a portfolio because of their ability to protect against price volatility, as their value does not drastically change during market turmoil, which could be triggered by economic downturns, political unrest, global tensions, etc. So, how much gold should seniors hold in their investment portfolio? Or is there a rule of thumb that they can follow?
Investing In Gold
Gold investments depend on financial goals, time horizons, risk tolerance, and the overall market scenario, like inflation status, geo-political circumstances, etc. As such, proper asset allocation is crucial because all asset classes react differently to changing market conditions. For example, when a particular asset class performs well, another may not. Thus, asset diversification ensures price stability in the portfolio during a volatile market. However, unlike most other assets, gold prices stay largely stable during periods of higher inflation.
Kavitha Menon, a Sebi-registered investment advisor, says, “Asset allocation should be based on your life’s goals, your risk profile, the time frame in which these need to be achieved, liquidity needs, and taxation impact.” She explains, “There are no thumb rules as asset allocation is as unique as your DNA. So, a do-it-yourself (DIY) approach may not work”, as it is usually copied from someone else’s work. So, how useful is gold in the portfolio?
Menon adds, “Gold has proven to be a hedge against adverse market conditions and inflation. Hence, an allocation to gold is recommended”. Gold has proved to be a relatively safer asset class in the long term. Though, in the short-term, gold can be volatile just like equity, she says.
How Much Gold Should You Allocate In The Portfolio?
While it is generally believed that gold exposure should be around 10 per cent in the portfolio, it is not a fixed rule. It should be based on the investor’s age, goals, risk capacity, etc.
Menon says, “Asset allocation, including gold exposure, is a function of the client’s unique needs and risk profile. There are no thumb rules. Again, your unique requirements are the first consideration for deciding if gold has its use in your portfolio and in what form you should hold it”. Generally, people consider gold jewellery as their investment. According to Menon, “It is usually seen that investors are averse to transacting in personal assets like gold jewellery and property for asset rebalancing. Jewellery does not lend itself to rebalancing due to its illiquid nature and high transaction costs. Hence, in financial planning, advisors usually keep personal assets out. Only if the client wants such jewellery to become part of the allocation exercise do we include it”.
So, gold in the portfolio generally means gold in other forms. There is no set thumb rule for the percentage of allocation in gold; it can be used in the portfolio as per the individual’s requirement for diversification and hedging against inflation.