Getting Gold Allocation Right For Your Portfolio

What percentage of my IRA should be allocated to Gold? 

This is a common question asked by many precious metals investors when they make their first foray into a gold-backed IRA.

Typically, these investors have seen massive rises in gold and want a piece of the action. Unfortunately, many investors who jumped in since gold’s peak in 2011 have seen the value of their gold drop by up to 35%. This is because like most investors, they simply followed the crowd and bought when the prices were high at the peak of the market, instead of keeping a level head, staying calm and buying their assets strategically.

Build Your IRA Portfolio Strategically

To avoid making the same mistake when building up your self-directed IRA, you need to stop reacting impulsively and buying assets without a strategic plan in place.

One of the ways you can do this is by thinking about what asset allocation you would like in your IRA.

Like diversification, which reduces the overall risk of your portfolio losing value by holding different types of asset classes, asset allocation takes this idea one step further by strategically diversifying a portfolio further according to a pre-defined plan that takes into account the investor’s particular investment goals, risk appetite and investment maturity timeframes.

With a well-planned asset allocation strategy, investors are able to benefit from the changing phases of market cycles and can greatly reduce the overall risk to their portfolio by ensuring a much higher degree of diversification than would otherwise be possible.

The general theory behind asset allocation is based on the simple fact that different asset classes experience different degrees and periods of volatility. For example, paper-based assets like stock and shares can experience massive and rapid swings in their valuations, with some stocks losing all their value overnight. The value of physical assets like gold and other precious metals however, are much less prone to these massive overnight losses and in theory will never be considered worthless. Furthermore, the rise and fall of stocks and shares generally moves in opposite direction to the rise and fall of precious metals.

Asset allocation takes advantage of this simple fact by allocating a mix of paper-based and physical assets into a portfolio, so that no matter what the market cycle, at least something in the portfolio is rising in value, counteracting the losses being experienced by the other asset classes.

So this is where the question at the start of this article becomes relevant, i.e. in order to reduce the risk of portfolio devaluation, “what percentage of gold should I hold in my IRA?”

The 3 main gold allocation scenarios

There are 3 main gold allocations that are used to define the amount or percentage investors should be holding in their IRA, based on their overall risk appetite.

Light Allocation in Gold

Investors who have a light allocation in gold would typically have around 5% – 10% of their IRA portfolio held in gold. These investors will normally have a well-diversified portfolio already, is comfortable with the near-term future of the economy, but just wants to have that little bit of insurance for their investments.

These investors will also typically have a light allocation in currencies from economically stable countries and/or commodities.

Moderate Allocation in Gold

Investors who are holding anywhere from 15%  – 25% of gold in the IRA portfolio are typically classed as moderately allocated in gold. Most investors fall into this category due to the current unstable economic conditions of the past few years.

A moderate allocation in gold is for investors that realize the very real threats to their current investments and are looking for a stable physical asset they can use as a strong hedge against inflation and possible loss of value of their paper-based assets.

High Allocation in Gold

An IRA portfolio with an allocation of 30% – 50% in gold is considered to be highly allocated or ‘heavily weighted’ in gold. Investors with these levels of gold in their portfolio are convinced that the stimulus measures introduced by the U.S. government and Federal Reserve will eventually implode and result in financial disaster.

However, like any portfolio that is highly allocated in one asset class, investors with this sort of portfolio must be extremely vigilant and disciplined in their asset reallocation schedule to avoid profit loss due to short term bull markets. As long as the investor rebalances their allocation throughout the year, a portfolio with a high percentage of gold has a volatility that is very similar to a more traditional paper-based asset portfolio, but with higher returns.

A Balanced Gold Portfolio That Works For You

So in summary, make sure you plan your IRA asset allocation well in advance of any asset purchases. Decide what your overall investment goals and risk appetite are and plan your gold purchasing schedule and allocation levels accordingly. With good planning, you will dramatically reduce the risk of your portfolio dropping in value due to any unforeseen market corrections.

If you would like to take advantage of the many opportunities found in gold.  You’ll need to find a reputable gold ira specialist tailored to your specific needs.  The best way to do that is to have a quick chat on our homepage. You’re sure to find a highly rated Gold IRA provider that fits your circumstances and can quickly and easily walk you through the process.