Before the economic recession starting in 2008, portfolio diversification usually consisted of mixing in various stocks and bonds to spread risk. The goal of diversification is to combine negatively correlated assets so that when one asset drops down in value, another is likely to retain its price or become more valuable.
The traditional approach to diversification was founded on the idea that different stocks and bonds could have this relationship. The problem with that assumption is that so many investment possibilities on the stock market rise or fall according to the same factors. That’s why, in the aftermath of the economic downturn, it became clear that adding different asset classes to one’s portfolio is a key in proper diversification.
Precious metals investing is a great way to do that. Precious metals like gold, silver, platinum, and palladium represent a separate class of assets because their value increases or decreases based on separate variables from those that determine the price of stocks and bonds on the market. Whereas stocks and bonds can be heavily dependent on the performance of the economy, precious metals are more dependent on their intrinsic value and sentiment toward them from various communities.
Benefits for Your Portfolio
Precious metals investing can have a variety of benefits for your portfolio, specifically accomplishing the goals of proper asset allocation and hedging. When determining a good allocation of assets in your portfolio, it’s important to consider a couple of factors. First, most investors try to shoot for a certain balance of assets in order to guarantee long-term profits. While the numbers on each asset class vary, it’s important to include some amount of precious metals investing. Studies have indicated that a good strategic allocation for precious metals sits between 5 and 15 percent of one’s portfolio, a departure from the traditional viewpoints that say a strong portfolio can consist of only stocks and bonds.
Additionally, asset allocation can include tactical decisions regarding the particular investments filling each asset class. That means that smart, active investors are able to boost their portfolios by analyzing the prospects of each investment possibility and target specific items. Precious metals investing is on the rise because of the positive outlook in that market.
Weighing Risk and Return
Precious metals investing can take a number of forms in people’s investment portfolios. Bullion and coins are the most tangible form of investment, but there are a number of other opportunities that allow people to choose the balance of risk and return that suits their tastes.
Tangible quantities are generally the safest investments, although they can also have low liquidity. Another option is to invest in an exchange-traded fund that includes some amount of investment in precious metals. Mutual funds may invest directly in bullion, or they may involve mining company stocks. In addition, they can include investment in one or more metals, and they can also include a variety of other commodities. Each mutual fund balances its investments to target specific rates of risk and return, so investing in these allows each investor to find an appropriate amount of each.