Advice on investment diversity in light of the recent gold boom.
Is it better to invest in gold or stocks? Or both?
Interest in gold is largely driven by concerns, both short-term and long-term, over the declining value of the dollar. These concerns are valid. Warren Buffett has said, “If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011 five years, 10 years or 20 years from now, I would tell you it will not.” I suspect that is an understatement.
You might expect, given Buffett’s concern over the dollar, that he would be an advocate for gold. But he isn’t. Here is how he described his basic investment philosophy in an interview on CNBC in March: “So there are two types of assets to buy. One is where the asset itself delivers a return to you, such as, you know, rental properties, stocks, a farm. And then there are assets that you buy where you hope somebody else pays you more later on, but the asset itself doesn’t produce anything. And those are two different games. I regard the second game as speculation.”
Buffett goes on to say that there’s nothing wrong with speculation, just that it’s a different form of investment and that he prefers owning productive assets.
While including alternative investments such as precious metals and commodities in your portfolio as a hedge against a declining dollar can make sense, don’t forget that stocks act as a hedge in their own way.
When you invest in stocks, you become a partial owner in a “living” entity. The company’s value goes beyond the currency that its stock is traded in. The company’s value is reflected in its stock price; however, there is a deeper value that is a function of the assets and liabilities on its balance sheet and the many intangibles that allow it to generate profits.
History shows that over decades, stocks generally provide a more robust rate of return than either silver or gold. Given the substantial increases in the price of gold over the last several years, and the extra attention it receives in the media, I am concerned that people will allocate a greater portion of their portfolio to it than is prudent.
Ecclesiastes 11:2 describes the basic investing principle of diversification that is as valid today as it was centuries ago: “Give a portion to seven, or even to eight, for you know not what evil may happen on earth.” The principle is simple: Don’t put all of your eggs into one basket. And that includes gold.
As you plan, visit with your professional financial adviser to review your investment strategy. Make sure it follows the principle of diversification and is appropriate in terms of risk for your stage in life. God love you!
Phil Lenahan is president of Veritas Financial Ministries (VeritasFinancialMinistries.com) and author of
7 Steps to Becoming Financially Free: A Catholic Small Group Study (OSV).