As an investing safe haven during times of economic uncertainty, gold can provide a diversifying addition to your portfolio. However, it can be challenging to know how best to invest in gold.
Physical gold investments typically involve dealing with outside dealers and storing your investment securely. ETFs and mutual funds that specialize in gold often offer lower risk and higher liquidity than physical assets.
Physical Gold
Physical gold can be purchased as coins, bars or jewellery. It’s an attractive option for some investors because it is tangible and can be stored outside the traditional banking system in case a crisis hits. Physical gold also tends to have lower transaction costs than investing in a gold ETF, though storage and insurance expenses add up over time. However, the downside of buying physical gold is that you are at the mercy of the market’s price volatility and you might have to pay higher dealer markups.
Investing in physical gold can be done through government mints, private mints, precious metals dealers and jewelry stores. Investors should generally avoid numismatic coins and other gold items that are geared toward collecting and gift giving, as they may not be suitable for investment purposes. When selecting a business to buy from, you should give consideration to their resale policies and fees, as these can have a big impact on your overall return.
The purchase of gold through the futures market is another way to acquire physical gold, but it’s not for novices. Buying on the futures market requires a significant initial investment and comes with a list of other costs, including storage and insurance. The process is complicated, cumbersome and lengthy.
Exchange-traded funds (ETFs) track a specific commodity, such as gold, and are traded on the stock market. While they can offer lower initial costs than purchasing physical gold, ETFs can have high management and trading fees. In addition, they might not be as easily sold and redeemed as physical gold.
Investors can also purchase shares of gold mining companies, which provide exposure to the prices of the metal without having to worry about storage or security issues. Gold miner stocks can be a good choice for those interested in socially responsible investing, as they may offer an opportunity to support sustainable and environmentally friendly mining practices.
While gold is often seen as a safe haven asset that can help reduce the risk of a financial crisis, it’s important to remember that any type of investment comes with its own set of risks and rewards. Before investing in gold, it’s essential to make a personal assessment of your risk tolerance and understand how much gold should represent in your portfolio.
Mutual Funds
Mutual funds are a popular investment vehicle that allow individuals to invest in diversified portfolios of stocks, bonds, real estate and other assets. These funds offer advantages such as professional management, low cost and diversification. However, investors should carefully research different fund options and pay attention to fees and taxes.
Investors can purchase mutual funds through a brokerage account or directly from the fund company. Investors should review the Fund Facts and Simplified Prospectus to understand a fund’s investment objectives, fees and expenses. Also, they should check how the fund has performed versus its benchmark and its peer group over both short and long periods of time to get a better idea of what to expect from the fund.
Before selecting a mutual fund, investors should assess their financial goals and risk tolerance. They should also determine the type of management they want — active funds seek to beat the market, while passively managed index funds track an index. Both strategies come with pros and cons.
Some funds are designed to generate regular income through dividends from stock holdings or interest payments from bond holdings. These funds typically pay dividends at least annually, and sometimes quarterly or semi-annually. Other mutual funds are geared toward growth, and still others are asset allocation funds that shift their mix of stocks and bonds to reflect changing market conditions.
There are also socially responsible mutual funds that invest in companies with strong environmental and labor practices. These funds generally have lower returns than other investment vehicles, but they can provide a stable source of income over the long term.
Once you’ve selected a mutual fund, you can invest a lump sum or use a systematic investment plan (SIP). SIP allows you to buy units of a fund on a regular basis, usually monthly, regardless of the price of the fund. This technique, called dollar-cost averaging, can help you grow your money over time.
When selling a mutual fund, you can do so through your brokerage account or by contacting the mutual fund company. Keep in mind that the proceeds from the sale may be subject to capital gains tax, depending on your current tax bracket.
Exchange-Traded Funds (ETFs)
ETFs offer investors a cost-effective way to build diversified baskets of securities in their portfolios. They can be used to invest in virtually any sector or market index, and many are passively managed. This means that they work toward their investment objective without the need for daily reporting and record keeping for thousands of individual investors, which saves money for ETF companies, and those savings are passed on to individual investors in the form of lower fund expenses.
ETF shares are traded on a stock exchange throughout the day, similar to how stocks are traded, and can be purchased at any time during trading hours for an intraday price, which allows for real-time price movements. Like mutual funds, ETFs come in different styles and sizes, and are bought by beginning and experienced individuals as well as institutional investors.
The most common type of ETF is one that tracks a market index, such as the S&P 500 or the Dow Jones Industrial Average. However, there are also ETFs that track specific sectors and industries, or investment strategies such as inverse investing. Some are actively managed by SEC-registered investment advisers, while others are passively managed.
To buy an ETF, first transfer cash to your brokerage account. Then go to your brokerage’s trade section and search for the name of the ETF you want, along with its ticker symbol. Once you find it, enter the amount of shares you want to purchase. You can choose to buy on a market order, which gives you instant access to the best available price, or a limit order, which sets your maximum purchase amount.
As with any security, an ETF may be shut down by the company that manages it if it doesn’t bring in enough new assets to cover its costs. While this is a rare occurrence, it can happen, so it’s important to do your research and evaluate ETFs on their own merits before buying them.
To invest in gold via an ETF, you’ll need to find a trusted online broker. The best brokers for beginners and advanced traders have a low minimum deposit, no hidden fees and easy-to-use trading platforms that let you customize your experience.
Shares of Gold Mining Companies
Buying gold mining companies is another way to gain exposure to this precious metal without owning physical bullion. Mining companies profit two ways when gold prices rise: they can make more money selling their own shares and can also earn a royalty on the sale of gold from their mines. Some miners also pay dividends, which can boost your income. These stocks often react in a leveraged manner to the price of gold, so they can be very volatile.
Most of the gold mining companies that trade on a public exchange are seniors that have already been producing for a long time and have large market capitalizations, so they have greater liquidity and less volatility than junior explorers. The best senior gold mining companies have hedging policies that help to protect against falling prices and can maximize profits when bullion prices are high. Junior explorers, on the other hand, are searching for new assets and have extraordinary operational risk. Some of these explorers have been acquired by the larger gold mining companies, so you can sometimes gain the upside of the original miner while reducing your risk.
If you want to get into the gold mining business but don’t have enough capital to buy a gold miner, you can invest in a gold ETF. These funds can be purchased through your brokerage or investment app and are generally less volatile than the individual mining companies. Leveraged gold ETFs, which generate two to three times the return of spot gold prices, can increase your upside potential but also magnify your losses.
Ultimately, your decision on how to diversify your portfolio with gold will come down to your investing goals and tolerance for risk. You may see the opportunity to hedge against inflation or other calamities or simply want the opportunity to earn a stream of dividends. Regardless of your investment goal, it’s important to research all the options that are available to you before making any decisions. The more information you have, the better you can make an informed choice about how to purchase and hold gold in your portfolio.