The recent COVID-19 pandemic has made investors more recency biased towards asset class be it gold, stock, mutual fund, or any other asset class. They have seemed to develop the tendency to place too much emphasis on the ongoing market events. In investing world, it is kind of hard to avoid. In doing so, they make short-term decisions in an attempt to catch the price movement, expecting that the events will continue further into the future. Sometimes, it makes investors take rash decisions, such as following false trends or selling during the downturn. But, tbh, even market experts find it difficult to predict the bottoms and peaks.
The same thing happens in investing in gold. Many equity investors tend to emphasize movement in gold prices. It is very common in millennials and Gen X equity investors who overemphasize the ongoing market events. To combat recency bias while investing in gold require knowledge and the right perspective towards an asset class for allocation in your portfolio.
Below we’re going to mention some key points that an equity investor must consider when making investments in gold.
Investing in Gold
One of the reasons why equity investors invest in gold is to create a balanced investment portfolio. It has often seen that many asset classes such as Gold have a negative correlation with equity. The logic for gold investing is the same, have some allocation to it so that the equity volatility in the portfolio can be lower to that extend i.e., low positive correlation. The benefit of doing this will be risk-adjusted returns.
- For investing in gold, it should be as per the investor’s profile, investment objectives, and time horizon. Also, the extent of other asset class should be on the lower side so that they won’t become a major part of an investment portfolio.
- The rationale for gold allocation being on the lower side is because gold does not produce any economic wealth. It does not use as much copper and aluminum on an industrial scale.
- Gold prices tend to move in times of uncertainty like geopolitical tensions, pandemic, USD depreciation, and so on. Having a heavy gold-based investment portfolio may lose its shine in normal times. It is that time an equity investor must remember that gold investing was to minimize the volatility to that extent.
- If you not aggressive, stay away from derivatives of gold’s prices. The investment made in these derivatives can see sharp ups and downs, which may affect your investment portfolio. Instead, choose to invest in Gold ETFs or Gold Mutual Funds that provide more support and investing haven.
Regardless of the form of gold you choose to invest in, it is recommended to not allocate more than 10 per cent of your portfolio to it. Every asset class carry risk. Gold is no exception.