21 Rue Glesener, 1631 Gare Luxembourg, Luxembourg

Picture of the author

Client area

1206 2024


Invest in Stocks or Gold? Charting Your Strategy

Philippe Schneider

Building an investment portfolio aligned with your goals requires careful research and consideration. Each investor has different goals, but everyone gets to select from the same pool of asset classes. Determining which assets should fill your portfolio is no easy feat. Successful efforts in this area could pay dividends—so it's vital to do your homework and determine what offers the most potential value to you.

In recent years, more investors have turned to an age-old question: should I invest more in stocks or gold? Historically, high gold prices and recent strong market performances have left some investors increasingly unsure about the best path forward. What's the most astute way to capitalize on your investment? Does one option stand out above the other?

We must examine both asset classes more closely to answer these key questions. Considering their benefits and drawbacks helps illuminate the factors to evaluate and decide. Now, consider the following assets and explore what each might offer an investor.

Buying Gold vs. Stocks

Stocks are a historic asset class. However, they can be much more complex than in past days of joint-stock companies, as stocks still represent a shared ownership. Owning stock may entitle you to dividends and other benefits from successful enterprises. Others trade stock more frequently. Most investors obtain stock on open markets, while others may purchase private shares.

Gold is an even older asset class—we might call it one of the oldest assets. Gold's value derives from its rarity and usefulness and acts as a store of value because of the global belief in its value. When investing in gold, you can choose between paper ownership, through Exchange-traded Funds (ETFs), or by directly owning physical gold bullion.

Let's break down the pros and cons of investing in either category.

Why Choose to Focus Investments on Stocks?

Stocks are a significant source of investment and often comprise a large proportion of the most well-balanced portfolios. There are several reasons for this. Chief among those is the long-term value of holding stocks. While day trading provides an opportunity for short-term gains, it is a volatile proposition. On the contrary, well-selected long-term holdings tend to generate a reliable return, around 10% on average.

Stocks can also provide passive income when invested in companies that pay dividends. At higher investment levels, those dividends can be substantial. If a company continues to grow and succeed over time, dividends often grow along with it. In some cases, early investments in the right brands can even lead to high gains over time.

Stocks are generally easy to purchase and sell, allowing investors to retain a key source of liquidity. These reasons make stocks a standard anchor of many portfolios.

Complications Surrounding Stock Market Investments

Stocks do have some drawbacks. Understanding these issues is crucial in seeing why a shrewd portfolio includes more than a long list of stock investments. Some of the key disadvantages to be aware of include:

• Short-term capital gains taxes can come at higher rates and impact the profitability of investments by those with a higher appetite for risk.

• Markets are unpredictable, and the past doesn't always predict the future. Downturns and recessions require weathering harsh economic conditions that may persist for years before asset values recover and climb.

• Price volatility is an issue; even a sound investment can go wrong if a company isn't managed well.

• Inflation can impact the value of your portfolio.

There are good reasons to invest in stocks, but some aspects may give investors pause. What about gold?

Why Some Investors Choose Gold

Many investors choose to keep a portion of their portfolio in gold because of its nature as a store of value. The eternal demand for gold and its widely-recognized value make it a relatively low-risk investment. Gold prices tend to be stable or appreciate slowly over time; crashes in gold prices are rare. The value of gold you hold won't change much compared to the volatility of stocks daily.

Investors also choose gold to guard against inflation. Since its value is so stable, it tends to be a better hedge investment to protect the overall portfolio. Even when other economic indicators trend downwards, gold tends not to follow those trends. In times of the most significant uncertainty, gold may increase in value as more people seek its stability.

Where Gold Investments Get Tricky

Gold is an excellent asset choice for diversifying and obtaining a stable value in your portfolio. However, it does come with drawbacks. These include:

• It is much harder to realize gains on gold investments unless you choose to sell when gold prices spike. That could make it a better short term asset for those with such an appetite, but in its usual role, it is not usually a profit generator.

• You must physically store and safeguard gold unless you invest through an ETF or other instrument.

• Gold investments may also face more complex or higher tax requirements, making them less suitable for some investors.

• Gold does not generate passive income for asset holders like stocks do.

With all this in mind, is there a right way forward?

Making Smarter Moves With Your Money

Gold has been a go-to choice for specific investors for many years, providing a solid store of value and price stability. While stocks represent more volatile investments, they also offer more flexible opportunities for gains. Both assets require care when planning around tax requirements. Ultimately, there is no right or wrong answer to the question, "Should I invest in gold or stocks?" Both assets have strengths and weaknesses. Ultimately, that provides an opportunity to pivot towards a fundamental aspect of successful investments: diversification.

A smarter investment strategy may balance gold and stock market investments. Investors should assess how to do so in ways that align with individual risk appetites, investment goals, and the time scale on which they'd like to see results. A portfolio that includes a portion of a more stable asset, such as gold, could provide a better hedge against future uncertainties. As you chart the course of your own investments, take a balanced view of these two asset classes and build the portfolio that best aligns with your needs.

Philippe Schneider

Related Posts

0906 2023

The Value of Diversifying Your Investment Portfolio

2806 2023

Compound Investing: Unlocking the Power of Time and Growth

Copyright 2014-2023 DHF Capital S.A. All Rights Reserved

Picture of the author