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MoneyWatch: Managing Your Money

How gold protects your portfolio from losses

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By Kelly Ernst

/ CBS News

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Whether you're in the midst of a bad economy or wondering how to survive an upcoming one, gold is worth considering. Getty Images/iStockphoto

The economic news has been a series of unfortunate events in recent years, including interest rate hikes, bank failures and talks of an impending recession. Our dollars are worth less as inflation ups the price of everything. And the stock market reacts to each of these events by taking investors on a nerve-wracking rollercoaster ride. It can leave many wondering just how safe their money really is in their portfolios — and how they can make it safer.

When times are tough, many investors turn to gold. Gold has a reputation for being a trustworthy investment that has stood the test of time and proved to be a safe haven even in the most turbulent market conditions. Whether you're in the midst of a bad economy or wondering how to survive an upcoming one, gold is worth considering.

In this article, we'll explore how gold adds stability to your portfolio and why it should have a place in your investment strategy.

Learn more about gold investing by .

How gold protects your portfolio from losses

Gold is a worthwhile investment for many reasons. Here's how it can safeguard your portfolio.

It balances out risk

The stock market is known for volatility. Stock values can plummet overnight as a result of everything from political news to bad PR for a company, taking a large amount of your money with them.

That doesn't mean you shouldn't invest in stocks. They offer potentially high returns that make some measure of risk worth taking. You just want to be sure to counterbalance that risk by diversifying your portfolio with more-conservative assets like gold.

"Gold typically behaves in inverse correlation to the stock market," William Bevins, CFP, CTFA, previously told CBS News. "As a result, when the stock market takes a downturn, gold often increases in value."

For example, analyzed the eight biggest stock market crashes of the last 40 years and found that gold prices rose in six of them. This relationship makes gold a great way to preserve value in your portfolio when stocks take a dive.

It provides steady returns

While the price of gold can waver in the short term, it typically holds its value better than other assets, such as stocks (which are subject to market whims) and fiat currency (which is subject to overproduction and devaluation). This makes it a unique and valuable part of any portfolio.

"[Gold] is an alternative way to build and protect wealth not available in the stock and bond markets," says Gregory Lawrence, CFP at Lawrence Legacy Group. "It is the only asset that is not someone else's debt or obligation. It is one, if not the best, asset to own in uncertain times."

It performs well in tough economic times

Gold can weather many economic storms, from inflation to recession. It can be a powerful hedge against financial instability and decreased purchasing power, as well as provide a cash reserve when times are tough. In fact, when stock prices are low and the dollar is weak, gold tends to shine.

One stark example of this is the 1970s, an inflationary period when interest rates climbed into the double digits. At the beginning of 1970, the federal funds rate averaged 8.98%. By the beginning of 1980, it had reached 13.82%, according to . Gold prices also skyrocketed over that period, from $35 to $850 per share, according to .

The bottom line

There are many ways to invest in gold. Whichever you choose, experts recommend holding no more than 5% to 10% of your portfolio in gold to maximize returns and minimize risk. Start by asking yourself these important questions to determine the right allocation for you. Then, to begin exploring your options.

Edited by Matt Richardson

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