By John McDonald
Most investors who hold gold in their portfolios feel confident of their ability to withstand economic volatility and turmoil in the markets. However, according to a new report from the World Gold Council (WGC), those investors are likely making some seriously inaccurate assumptions about their yellow-metal assets.
WGC analysts warned that several common beliefs held by investors who have gold in their portfolios could lead those investors to seriously underinvest in the asset and experience far less protection via the safe-haven investment than they are expecting in the event of an economic downturn.
Many analysts recommend weighting your portfolio with a cumulative 10% gold. Even if you think you have accomplished this, one of these mistakes may mean you actually are underinvested.
If you hold gold in your portfolio, you must identify these mistakes in your own thinking and correct them quickly to ensure your investment strategy aligns with your investment practices.
Mistake #1: Investing in an index has you covered.
According to the WGC study, many investors said that they are invested in a broad-based commodity index when asked how they are holding gold. They have made the mistake of thinking their vehicle of choice is mainly invested in gold because that is what they would do personally.
Unfortunately, most major commodity indices have a relatively small weighting in gold.
If you are relying on this type of investment to keep your gold investments covered, you are probably going to come up short.
Mistake #2: Recommended portfolio weights are just for bullion.
WGC director of investment research, Juan Carlos Artigas, recommends investors have 2-10% weight for gold in their portfolio. Less specialized advisors may recommend weights on the lower end because investors are hesitant to hold too much bullion in their portfolios.
In reality, that heavier weight of 10% is not just bullion. In most cases, about half of your gold investments should be in bullion and half in high-quality gold stocks.
Failure to diversify among your gold investments usually leads to underinvestment in this asset.
Mistake #3: Holding bonds is as safe or safer than holding gold.
Historically, U.S. Treasury bonds have been considered a safe-haven asset just as gold is. Many investors whose portfolios are heavily weighted with bonds believe they do not need to own much gold.
However, since the start of the most recent gold price rally, gold-back ETF holdings have climbed as savvy investors pile into this asset class. Bond yields are presently at historic lows, but gold is still high and climbing. WGC believes gold could actually replace bonds as “an attractive and more effective diversifier.”
If you are relying on bonds to keep your capital insulated from the markets, you could find yourself in trouble.
Nothing Can Take the Place of Gold
In light of this information, it will not surprise smart investors that WGC concluded the report with the observation, “It may be time to replace bonds with gold.” If you found any of the mistakes in this article looked familiar to you, it is not too late to add some gold weight to your portfolio. Act quickly so you can participate in the ongoing gold rally with other prepared, savvy investors.Source: Forbes