4 of the most common mistakes people make when investing in gold

[UNITED STATES] Gold has long been considered a safe haven for investors, particularly during times of economic uncertainty. As we approach the end of 2024, gold prices have reached unprecedented heights, attracting more attention from both seasoned and novice investors. However, investing in this precious metal is not without its pitfalls. In this comprehensive guide, we'll explore four of the biggest mistakes experts have identified in gold investing, providing you with valuable insights to make informed decisions.

Gold has experienced a remarkable bull run throughout 2024, culminating in a record high in October. This surge in value has been largely attributed to investors seeking a hedge against inflation and a means to diversify their portfolios. As Drew Martino, wealth manager at Savvy Advisors, explains, "The primary reason to invest in gold would be to keep up with inflation. Gold doesn't pay dividends or interest like stocks and bonds; you simply rely on price appreciation."

The current economic climate has undoubtedly contributed to gold's popularity. With the purchasing power of the US dollar continuing to decline, many investors are turning to gold as a store of value. However, this rush to gold has led some to make critical errors in their investment strategy.

Mistake #1: Over-Investing in Gold

The Temptation of Overallocation

One of the most common mistakes investors make is allocating too large a portion of their portfolio to gold. While gold has historically been a reliable store of value, it's essential to remember that it often underperforms compared to other high-yielding assets like stocks and bonds.

Balancing Your Portfolio

Martino advises, "I think it's still a great time for the average investor to consider buying gold if they already have an established portfolio of stocks and bonds. I wouldn't recommend investing in just gold if you don't own any other assets." This balanced approach is crucial for maintaining a diversified portfolio that can capitalize on various market opportunities.

Comparing Returns

To put this into perspective, consider the performance of gold versus the stock market. In 2023, the S&P 500 index delivered an impressive 26.3% annual return, while gold's annual return was 13.1%. While gold outperformed traditional savings accounts and cash holdings, it shouldn't be the primary growth-oriented investment in your portfolio.

Expert Recommendation

Stephen Jury, Global Commodity Strategist for J.P. Morgan, suggests a more conservative approach: "In our view, an allocation ranging from 5% to 10% would be most prudent." This allocation allows investors to benefit from gold's stability while still maintaining exposure to potentially higher-yielding assets.

Mistake #2: Attempting to Time the Gold Market

The Pitfalls of Market Timing

Another significant error investors make is trying to time the gold market. This strategy involves attempting to buy low and sell high based on market predictions. While it may seem appealing, especially given gold's recent performance, timing the market is notoriously difficult and often leads to losses.

The Buy-and-Hold Strategy

Jury emphasizes the importance of a long-term perspective: "The optimal investment approach, consistent across all asset classes, is a buy-and-hold strategy with a long-term perspective. This strategy aligns with the principles applied to stocks and bonds. Time in the market always beats timing the market."

Gold's Long-Term Outlook

Despite gold's current bull run, it's important to remember that market conditions can change rapidly. There may never be a "perfect" time to buy or sell gold. Instead, focusing on the long-term potential of gold as part of a diversified portfolio is likely to yield better results.

Jury remains optimistic about gold's future, stating, "It is liquid, a global store of value, and can be stored physically if needed. These characteristics make it very popular as a reserve asset. We anticipate that gold will continue to rise in the years ahead."

Mistake #3: Overlooking High Fees and Costs

The Hidden Costs of Gold Investing

Investing in physical gold comes with its own set of challenges, particularly when it comes to storage and security costs. These expenses can significantly erode potential returns over time. Additionally, high fees associated with certain gold investment products can further diminish the overall benefit of including gold in your portfolio.

Exploring Cost-Effective Options

To mitigate these costs, investors should consider gold companies that offer competitive prices and low fees. Many reputable gold IRAs provide attractively priced assets and reasonable rates.

Gold-Backed Investments

Another option to consider is gold-backed investments such as ETFs and mutual funds. Jury notes, "They generally charge a fee, but the expense ratio is usually very low." These investment vehicles often provide a more cost-effective and simpler way to gain exposure to gold compared to owning physical gold.

Understanding the Impact of Fees

Regardless of the investment method you choose, it's crucial to carefully review and understand how fees may impact your long-term portfolio growth. Even small differences in fee structures can compound over time, significantly affecting your returns.

Mistake #4: Neglecting Proper Research

The Importance of Due Diligence

In the excitement of a bull market, it's easy to get caught up in the fear of missing out (FOMO). However, making impulsive investment decisions without proper research can lead to costly mistakes.

Expert Advice on Research

Colin Bosher, COO and cofounder of Nuway Capital, emphasizes the importance of thorough research: "I would say that those people who are afraid of missing out — and they're seeing these record highs — that they should seriously consider putting some quality time aside doing their own research across multiple credible sources of information."

Understanding Gold's Role

While gold is often touted as a "safe-haven asset" due to its historical stability, it's crucial to remember that no investment is entirely risk-free. By understanding the history of gold as an investment and the best strategies for incorporating it into your portfolio, you're more likely to generate long-term wealth and achieve portfolio stability.

Vetting Gold Providers

When investing in physical gold, it's essential to know the source of your gold and ensure that the company you're purchasing from is reliable and trustworthy. This due diligence is crucial for long-term investment success.

Investing in gold can be a valuable component of a well-diversified investment portfolio, particularly in times of economic uncertainty. However, avoiding these four common mistakes is crucial for maximizing the benefits of gold investment:

• Avoid over-investing by maintaining a balanced portfolio allocation.
• Resist the urge to time the market and instead adopt a long-term investment perspective.
• Be mindful of fees and costs associated with gold investments.
• Conduct thorough research before making any investment decisions.

By following these guidelines and seeking advice from financial professionals, investors can harness the potential benefits of gold while minimizing risks. Remember, the key to successful gold investing lies in a thoughtful, well-researched approach that aligns with your overall financial goals and risk tolerance.

As we navigate the complex world of investments in 2024 and beyond, gold remains an intriguing option for many. By learning from the mistakes of others and implementing a strategic approach, you can make informed decisions about incorporating gold into your investment portfolio.