The writing’s on the wall: markets are poised for a long-overdue correction. Whether you believe a recession is imminent or not, you are probably hearing more and more people talking about the benefits that investing in precious metals may offer.
They are an alternative investment that’s been shown to acts as a true hedge against inflation. Here are some of the common pros and cons of investing in precious metals.
Pros:
- No counterparty risk
When you own gold, you own an asset where the risk of it going to zero is, well, zero. You don’t need any government or bank backing and you don’t even have to worry about your metal holdings going bankrupt.
In other words, there is NO counterparty risk so if you hold it, you OWN it.
- Allows you to diversify your portfolio
Diversification is the bedrock of successful long-term investing. You spread out your allocation of capital to avoid concentrating too heavily on one particular asset or risk.
Sure, you may reduce the chance of finding that one homerun stock that will make you a millionaire overnight, but it also avoids having to endure a disaster if things go terribly wrong in that stock or sector.
Diversification allows you to stay in the game for far longer and earning more consistent returns. When you invest in precious metals, you can be sure you will remain in the game.
- Doesn’t require any specialized knowledge
Finding the right stock market instruments to invest in can be a daunting task, even for the financial advisors who make a living in pitching stocks.
Owning precious metals like gold and silver in a retirement account doesn’t require any specialized knowledge or skills.
Cons:
- Doesn’t produce Income and Interest
One of the biggest benefits that IRA accounts offer is that they allow you to reinvest the dividends you receive from stocks and mutual funds on a tax-deferred or exempt basis.
This gives a nice little boost to the rate of compounding and enables your retirement account to grow at a faster rate than, say, a regular brokerage account.
However, gold is used as a store of value and not for producing income. So while you may not compounding any income, you own a solid asset that’s going to help shield your portfolio from powerful economic downturns.
- Owning precious metals is costly
Back in the day, stocks and bonds were given to their holders in the form of paper certificates. These days, investments are held in electronic form. Transferring your holdings from one brokerage to another can be done via an electronic transfer in a blink of an eye.
When you buy precious metals, however, you’re actually buying the physical asset. Although you could take those metals home and store them under your bed, it does raise the risk of losing your holdings in a home burglary or a natural disaster.
This is why most people store their metals in a secured vault at a certified bank. Needless to say, this comes at an added cost.
Whether you believe an economic downturn is imminent or not, knowing the pros and cons of precious metals investing will help you determine whether they have a place in your retirement holdings.
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