Gold is one of the most popular investments in the world. In fact, according to data-driven visual content site Visual Capitalist, the world population had $10.9 trillion invested in gold as of May 2020.
But what does money expert Clark Howard think of gold as an investment? And if you do invest in gold, what method does Clark recommend?
Clark’s 4 Rules for Buying Gold
1. Limit Your Investment to a Small Percentage of Your Portfolio
Whether through the “Core and Explore” philosophy popularized by Charles Schwab or while answering questions about Bitcoin or marijuana stocks, Clark has always maintained that a person should limit alternative class investments to a small percentage of net worth — typically about 5%.
Clark has made it clear that he thinks most people can enjoy a financially healthy retirement by simply investing every dollar into a target date fund. However, if you have the urge to add complexity to your portfolio for any reason, he suggests you limit it to a small amount.
Alternate investments typically are unpredictable and can be high risk. Clark considers putting money into this type of asset class, especially beyond 5%, as speculating rather than investing.
“Never put more money at risk than would keep you from sleeping at night if you lost all that dough,” Clark says.
2. Don’t Physically Hold the Gold You Buy
In the “old days,” which weren’t too long ago, you’d receive physical certificates of ownership for buying stock. Now, if you own shares in a company, it’s tracked electronically.
However, many people who buy gold want the actual mineral. This presents multiple issues.
First, it costs money to store gold. The gold could get stolen or lost. Second, there’s typically a large spread between the bid and ask prices for gold bars. In other words, if you want to hold the gold in your hands, you’ll probably pay a premium for the privilege, because the bid/ask spread can be large.
“I [like] the efficiency of avoiding the really expensive buy/sell spread when you buy physical silver or physical gold,” Clark says.
“And then you’ve got to figure out where to store it. What to do with it. That’s why I do prefer precious metals funds or gold funds when you are interested in having gold, silver or other precious metals.”
3. Buy Gold Through an ETF or ETN
How can I invest in gold without owning any physical gold?
There’s an elegant solution to that.
“My preference is that you buy the gold ETF or ETN where you have someone else who is responsible for storing the precious metal,” Clark says.
ETF stands for exchange-traded fund. They’re close cousins with mutual funds. You can buy and sell ETF shares on the open market just as you can with stocks. And there are plenty of good investment firms that allow you to trade ETFs without paying a cent in commission.
In a gold ETF, you pay a small fee for a group to manage the physical gold on your behalf. Each share represents a fraction of an ounce of gold.
Clark always preaches the importance of keeping your fees low when you invest, as it’s crucial to determining your wealth over time. Some of the gold ETFs with the cheapest fees include:
- iShares Gold Trust (IAU): 0.25% expense ratio
- Graniteshares Gold Trust (BAR): 0.175%
- Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL): 0.17%
- SPDR Gold MiniShares Trust (GLDM): 0.18%
An ETN (exchange-traded note) is more like a bond, but similar principles apply.
4. Check Your Motivation Before You Buy
For decades, a small but loud group of gold evangelists have clung to the idea that governments and financial systems in first-world countries (including the United States) could collapse.
Should that occur, they theorize, people holding large amounts of physical gold will be in a much better position to survive (or thrive).
Clark isn’t a proponent of this line of thinking.
“Having too much of your assets in physical gold means that you’ve lost all confidence in the future of America and the world,” Clark says. “And I hope your head isn’t there.”
Another common motivation behind buying gold is to hedge against inflation. As we close out 2021, inflation is constantly in the headlines. This could lead to fear-based purchases of gold.
However, most of the time, above-average inflation is short-lived. Even if inflation lasts for years, Clark says the best way to maintain your purchasing power is to keep a well-diversified portfolio with an age-appropriate exposure to equities (stocks).
The Rational Reminder investment podcast studied historical data around inflation and concluded that there’s no such thing as an asset that’s a perfect inflation hedge. (The Canadian financial advisors talk more in-depth here about why commonly suggested assets like gold don’t respond positively to inflation.)
It’s usually a bad idea to allow fear or financial dogma to dictate your investments. So make sure you understand why you’re buying gold even if you intend to invest only a small amount of your portfolio into the precious metal.
If you’re thinking about buying gold and you want to follow Clark’s recommendations:
- Limit your investment to 5% of your net worth.
- Buy a gold ETF or ETN.
- Make sure you understand why you’re buying gold.
To learn more about Clark’s investment strategies and philosophies, check out How To Save and Invest the Clark Howard Way.