Harry Markowitz, the economist often credited as the father of modern portfolio theory, is reputed to have said, “Diversification is the only free lunch in finance.”
Diversification does a lot of work in your portfolio and is still one of the investment basics new savers learn. Many 20th-century investing assumptions have been tested in recent years, but the underlying principle behind diversification remains sound.
Buying assets whose values aren’t correlated hedges against risk. Metal dealers, such as Thor Metals Group and others like it, offer their services specifically as a hedge against economic uncertainty.
When investing in gold, in addition to other assets like stocks and certificates of deposit, it’s important to understand the role different assets play to preserve your purchasing power over the long run. For those focused on retirement, comparing the benefits of a gold IRA against those of a standard taxable brokerage account is a crucial step in that process.
What are the benefits of stocks, CDs and gold in your portfolio?
Assets can be valuable for different reasons, and knowing how each asset fits into your portfolio strategy is vital to get the right mix of growth and value.
How do stocks drive portfolio growth?
Stocks are generally seen as a proxy for economic growth. Though betting on the next Apple or Microsoft could make you a multi-millionaire in the future, if you put all your money into the next Enron or WorldCom, you could lose a bundle in spectacular fashion.
The growing popularity of index funds comes from their ability to track the market as a whole, which means you get all the growth of economic innovation without having to pick individual winners and losers.
Certificates of deposit are having a moment
For a long time after the dotcom bust at the turn of the century, certificates of deposit (CDs) were considered little better than savings accounts and people were critical of the advantage of CDs vs. stocks.
CDs for 1-year terms went from yielding over 5% in 2000 to yielding less than 0.5% in 2010. 1-year CDs didn’t break above a 1% yield until October 2020.
Since 2022, CDs have had a renaissance as higher interest rates from the Federal Reserve have moved yields up considerably. With a 1- 3- or 5-year CD, you can lock in rates with a guaranteed return above 4% and very little downside risk.
Why is gold a good hedge against economic uncertainty?
Back in 2002, Donald Rumsfeld made the sage observation, “There are also [in addition to known unknowns] unknown unknowns — the ones we don’t know we don’t know.” Stocks are good investments for known unknowns, like how much a given technology will change the economy. But what if there is another Great Recession — or worse?
Gold is an investment for people who want to hold a store of value that doesn’t lose value in the face of unknown unknowns.
As Adam Bergman, founder of IRA Financial, points out, gold in your portfolio is an “insurance policy.” Gold is a “hedge against systemic inflation or currency debasement that 5% CDs cannot protect against. By keeping gold to a modest 5% to10% allocation, you treat it as a non-correlated safety net.”
To yield or not to yield
Markowitz, quoted above, recognized that investing is a balance between competing necessities: safety versus risk, liquidity versus yield and concentration versus diversification. The optimal allocation for your portfolio is determined by getting the best returns for the least amount of risk.
Individual stocks are the riskiest asset class, but they offer a greater potential for returns. Early investors in Apple, Microsoft and Nvidia are far richer than they would have been if they’d put their money in a CD for decades.
But even the most illustrious stocks have bad days, months or even years. When you’re looking at a loss of several thousand dollars, seasickness from stock volatility might make you abandon ship and miss out on all that gain.
That was the case in 2022 when stocks took a sustained hit after the Federal Reserve started raising interest rates rapidly after years of very low interest rates. Returns for CDs — whose returns are influenced by government bond yields — spiked in 2022, however, and investors started piling into these relatively safe, newly yielding investments.
But gold, which doesn’t pay a dividend or interest, also took a hit.
According to Bergman, “investors chose to sell non-yielding gold to buy more-attractive, higher-yielding government bonds, showing that rising interest rates can beat inflation as the primary driver of gold’s price.”
The math, as he explains, is simple: “Gold’s price appreciation must exceed the CD’s 5% yield over your time horizon. Ultimately, you sacrifice the CD’s guaranteed yield to gain protection against ‘tail-risk’ scenarios where cash or bonds lose real purchasing power.”
Tail-risk refers to the chance of a rare event occurring that leads to significant financial loss.
Luciano Duque, chief investment officer at C3 Bullion, says the lesson investors need to understand about gold’s place in your portfolio is that “gold is a long-cycle hedge, not a panic-day hedge. If you’re holding it expecting it to zig every time stocks zag, you’ll end up selling it at exactly the wrong moment.”
Conservative investors, according to Duque, “aren’t really choosing between yield and no yield. They’re choosing between two different bets on what the dollar is worth in ten years.”
When gold helps (and when it doesn’t)
Over the very long run, the net returns for the stock market blow everything else away. Stern School of Business professor Aswath Damodaran did the math, and if you invested $100 in gold in 1928, you would have $8,866.76 in 2022. That same investment in the stock market would net you $624,534.55.
But as the British economist J.M. Keynes famously said, in the long run, we’re all dead. Or another way of putting it is, life will happen to all of us differently. Putting all your eggs into the stock basket exposes you to a lot of risk, and gold may be the right hedge.
After a brief drop in 2022, gold has steadily gained value, outperforming the stock market for most of 2024 and 2025. The spread between the S&P 500 and gold opened wide after the announcement of “liberation day” tariffs, underscoring the importance of gold as a psychological guardrail during times of political and financial insecurity.
Of course, the opposite is also the case. During periods of low inflation and bull markets, the return on gold is far below the return on stocks. But analysts at J.P. Morgan think we may be entering a period of prolonged growth for gold prices.
The reason is the tail-risk scenarios cited by Bergman. Central banks around the world are adding more gold to their reserves for various reasons, not the least of which is the breakup of the old global financial order.
Given the finite supply of gold on earth, that makes what is left in the market more scarce — and more valuable.
How much gold should be in your portfolio?
Every investor’s situation is different, and the best advice you can get for your particular situation will be from a financial advisor who knows your situation.
Certain rules of thumb still apply, however; for people who are starting out in their careers and have a lot of time to contribute to their retirement accounts (and the economy and the world), a portfolio more heavily weighted with stocks is usually preferred.
As you approach retirement, your risk profile changes. Stock market volatility will not only destroy your ability to get a good night’s sleep, but it could also reduce the total amount of money you have to draw from in retirement. In general, as you hit your peak earning years in your mid-40s, it’s time to invest more in bonds, high-yield savings (like CDs) and gold.
Chris Berkel, an investment adviser and president of AXIS Financial in Edmond, Oklahoma, says, “I think you can use gold’s diversifying properties and scale back both bonds and stocks or take a little more risk and reduce just the bonds.”
How to add gold to your mix
There are many ways to get exposure to the unique investment properties gold brings to your portfolio. Daniel Ross, an investment analyst at Midas Funds, argues that “for younger investors we’d recommend shaving fixed income and for older investors, equities. In general, we recommend a long-term 5% to 15% allocation to outstanding gold mining companies through a mutual fund to obtain the diversification benefits provided by gold.”
Gold ETFs like State Street’s SPDR Gold Shares (GLD) hold gold bullion bars, giving investors in the trust exposure to the performance of gold bullion prices, minus the fund’s expenses.
Some people like to own their gold and store it themselves, which is possibly the cheapest option, but it requires you to take full responsibility for safekeeping and for finding a buyer if you have to liquidate your holdings.
Another option is a self-directed IRA with a trusted dealer like Thor Metals. Precious metals IRAs have their own rules that can be quite strict, but a gold IRA comparison between different providers can make owning and transacting with your gold easier. And under the right circumstances, they also offer a tax break.
The key to preserving wealth for your lifetime and for your children and grandchildren is optimizing your money’s growth amid future uncertainty. Gold has a place in a well-balanced portfolio — the key is to get the allocation right.
Frequently Asked Questions
What is the recommended percentage of gold for a diversified portfolio?
Financial experts generally recommend keeping gold to a modest 5% to 15% allocation in a well-balanced portfolio. This percentage provides a sufficient “insurance policy” against inflation and market volatility without sacrificing the long-term growth potential offered by stocks.
Why should I invest in gold if it doesn’t pay a yield or dividend?
Unlike stocks or high-yield CDs, gold is not designed to generate passive income. Instead, gold acts as a non-correlated store of value and a long-cycle hedge, protecting your purchasing power against currency debasement, systemic inflation, and unforeseen economic disasters.
Are CDs a better investment than stocks?
Certificates of Deposit (CDs) and stocks serve different purposes in a portfolio. CDs provide guaranteed returns and safety for short-term savings or risk-averse investors, while stocks offer significantly higher historical returns necessary for long-term wealth building, albeit with higher volatility.
What is the best way to add gold to my retirement savings?
Investors can add gold to their portfolios by purchasing physical gold, investing in gold ETFs (like GLD), or buying mutual funds focused on gold mining companies. For retirement-specific savings with potential tax advantages, investors can also use a self-directed precious metals IRA through a trusted dealer.
How does diversification protect my investments?
Diversification protects your wealth by spreading risk across different asset classes that do not perfectly correlate with one another. By holding a mix of growth assets (stocks), safe-yielding assets (CDs), and value-storing hedges (gold), a decline in one market can be offset by stability or growth in another.
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