Investing in gold vs. stocks: Which is better?
There are many reasons why investing should be a part of your financial plan. Savings are great for short-term goals, but they earn minimal interest. This makes them better for building an emergency fund and setting money aside for a specific goal, such as a new car or a vacation. Investing allows you to put your money to work for you long-term to build wealth, prepare for retirement and leave a legacy for your loved ones.
When it comes to investing, you have many options to choose from, from stocks and bonds to CDs and real estate. Below, we will compare the differences between two common investments, gold and stocks, to help you determine which might be the best for you.
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When gold is a better investment
As with any investment, gold has its pros and cons. Here are three times when it's a particularly good option:
- When you want to minimize risk: Gold has long been considered a safe-haven investment. Unlike stocks, whose value can fluctuate wildly from day to day, gold's value remains largely stable, making it a great way to preserve value in your portfolio. You might not see the big returns stocks could bring, but you won't necessarily see the big losses, either.
- When you want a hedge against inflation: Gold holds its value longer than other investment types, mang it a solid hedge against inflation. When interest rates are rising and the value of the dollar is dropping, commodities like gold can be particularly valuable.
- When you want a stable investment in a shaky economy: Because its value tends to hold steady, gold helps you weather the storm in times of rising inflation and banking uncertainty. It's especially valuable when the stock market is in turmoil. In six of the last eight biggest stock market crashes in the last 40 years, gold prices went up. For example, during the October 2007 to March 2009 recession, the S&P 500 dropped 56.8%, according to data from GoldSilver. Gold prices, by contrast, climbed 25.5%.
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When stocks are a better investment
Stocks have their own plusses and minuses. Here are three times when they're especially worth considering:
- When you want the potential for higher returns: Because stock prices frequently fluctuate, they're higher risk but have a higher return. You shouldn't put all of your investing dollars in stocks for this reason, but as part of a balanced portfolio, they can help boost your balance in the long run.
- When you plan on holding them for a long time: While stock values can swing wildly from day to day, the stock market has historically returned an average of 10%. That outperforms other asset classes, such as bonds. But to enjoy this return, you should plan to hold onto your stock investments for years (if not decades). If you engage in day trading, you run a higher risk of losing big money fast.
- When you want to receive dividends: If gold prices are higher when you sell your investment than when you bought it, you earn money. But you usually don't get anything from it until you sell it. Stocks, on the other hand, may earn dividends, or regular profit-sharing payments to investors. This provides passive income you can reinvest to buy more stock shares or use for cash. If you want an investment that provides an income stream, stocks are likely the better choice. Note: You might be able to earn dividends from gold stocks or gold ETFs, but these are riskier than investing in physical gold like bars and coins.
The bottom line
A healthy portfolio contains a mix of different asset classes to balance risk and reward. This diversification protects your money from market fluctuations and other times of economic uncertainty. Because they have different strengths and weaknesses, gold and stocks both have a place in your investment plan. Experts recommend holding about 10% of your investments in gold and a stock percentage of 100 minus your age. So, for example, if you're 40 years old, you should allocate 60% of your investing money toward stocks. By putting your money in both of these asset classes, you can create a strong portfolio that earns you money for years to come.
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