Precious metals like silver and gold may seem like dated investments to some. But given the current prices of gold, one can forgive a Self-Directed IRA investor who rethinks a strategy that takes them away from precious metals. With the freedom afforded you by a Self-Directed IRA, you can include precious metals in your retirement strategy—the only remaining question is, why? Here’s what you’ll need to know.
Why Precious Metals Make Sense in a Self-Directed IRA
“Gold is money. Everything else is credit.”
First things first: why precious metals? Given the above quote by J.P. Morgan, it’s important to understand the historical importance of gold. Gold is, essentially, money. It’s not an investment like a stock that’s going to give you a dividend yield. It’s not real estate that’s going to give you monthly rent checks. Gold’s job in your portfolio is to sit in your portfolio and stay there.
Given that, what on earth could gold possibly do to add security to your portfolio? Is not it better to invest in something that might appreciate as much as 10% or more per year?
Gold has a stabilizing effect on your portfolio, primarily doing its work as a hedge against inflation. Consider the infamous “all-weather” portfolio of famous investor Ray Dalio: the portfolio recommends holding 7.5% of one’s money in gold, with another 7.5% in commodities.
It’s not hard to see how this might help build a “hedge” portfolio that otherwise leans too heavily on stocks. But one thing to keep in mind with any investment is that it will always put your eggs in some basket. Even a traditional stock portfolio will tend to be denominated in U.S. dollars unless you build a significant international portfolio. Were the dollar to weaken, your portfolio would weaken along with it. Including precious metals in a portfolio helps offset this effect.
How Many Precious Metals Should You Hold in a Portfolio?
Typical recommendations for holding precious metals in a portfolio tend to vary from 2% to 10%, with Ray Dalio’s “all-weather” portfolio coming in on the stronger side at 7.5%. Remember that like anything, the prices of precious metals will fluctuate, which means that if you have a significant amount of precious metals in your portfolio, your portfolio will then tend to rise and fall with this price. Although gold is a source of stabilization within the portfolio, it still remains susceptible to these market forces.
As for the mix of gold and silver, that depends on your goals as well. For some people, investing only in gold is a way to keep the portfolio simple. Ray Dalio’s “all-weather” portfolio, for example, would recommend putting nothing in silver, as the 7.5% in gold would all go toward a Gold fund. But this is an individual decision, and the answer will always depend on your specific goals and investment strategy.
How Do Precious Metals Help in Retirement?
Given what you know about gold and silver as investments, the same lessons will apply when it comes to retirement. One way to make sure that you retire in comfort is to ensure that the value of your portfolio is not eroded by inflation. Even if your investments do well in their total monetary amount, inflation could erase those gains if it were to ever get out of control. Precious metals will tend to accelerate in value during periods of inflation, which helps you preserve wealth.