Monday, October 18, 2010

Is Gold a Smart Retirement Investment?

Is Gold a Smart Retirement Investment?

As one might expect, I frequently hear random financial questions from folks who “just want to know” what I think. Lately a very popular question involves wanting to get “my take” on whether they should invest in some of those shiny yellowish bars rather than focusing on the green bucks. Those of you who have been reading my posts for a while may remember that I discussed gold on March 29 of this year. I strongly recommend you read/reread that post for some further perspectives, because today’s discussion will spotlight an entirely different aspect of that conversation.

As I always say, the only smart thing to do in terms of your retirement strategy is to consider the facts and the facts only. Where am I going with this? I want to examine some events on this subject that have transpired during our lifetime.

You know how most financial professionals – and even amateur investors – agree that it is always a good idea to have a long-range perspective in retirement planning? To borrow one of my sixth-grade daughter’s favorite phrases, in this specific situation, I totally buy that. I researched the performance of gold vs. the S&P 500 Index over 30 years, in relation to inflation. For those not quite familiar with the term, inflation is the change in the prices of items. So in this instance, it is a measure of how much the price of items increased over the period we are considering. This factor will help us gauge the worthiness of these two investment candidates. Wouldn’t you agree that 30 years is a fairly good and realistic measure?

What do the numbers show for an investment of $100,000 on December 31, 1979 through December 31, 2009?

First, over the last 30 years, inflation averaged about 3 percent a year, which is to say that what you could have purchased in 1979 with $100,000 would require $242,726 to obtain in December of 2009. So in terms of making a financially savvy decision, we’d need that initial 1979 investment of $100,000 to be worth at least $242, 726 by December 2009. Now, I have yet to meet anyone in their right mind who would settle for an investment that would NOT improve their financial situation. Would you purchase an investment if you knew it would not increase your wealth? Of course not! People invest, expecting those investments to grow at a healthy rate.

Second, over those same 30 years, gold has averaged 1.05 percent annual growth, meaning that a $100,000 investment in gold in 1979 would have been worth $137,000 at the end of 2009. Specifically, the price of an ounce of gold was $850 in 1979 and increased to $1,150 as of the end of 2009 (and $1,360, as of last Friday). Therefore, if you had invested in gold over the past 30 years, your investment would not have kept up with inflation. You would have lagged by about 1.95 percent annually – and at the end of the 30 years, would have been short by about $105,726.

Third, if you had placed the same $100,000 in the S&P 500 Index over those exact same 30 years – December 1979 through December 2009 – you’d have seen a yield of $1,155,825. Yes – more than a million bucks! The index was 107.94 in December of 1979 and closed at 1,115.10 on December 31, 2009. That annual growth rate was more than 5 percentage points better than inflation, which means you would actually have gotten wealthier. Sounds more like what most investors are after, right?

Many of you may think I am an advocate against the stock market, but that’s not quite accurate. Actually, I quite like the stock market – but only when it’s up. But as we all know, that is not reality, so I use a methodology that allows my clients to enjoy the appreciation of the market without enduring losses in the negative years. So they don’t lose anything when the market plunges.

Now Let’s Put Things Into Perspective

Notice that we used the same 30-year period for both investments. We did not choose good years for one and bad years for the other. And over those 30 years, both the US and world economies experienced some really positive situations, as well as terribly negative ones, too. Both gold and the S&P 500 were on the very same playing field.

One investment truism that works 100 percent of the time: You can make money only when you buy low and sell high. So make sure that the price of the gold (or whatever investment product you decide to buy) will be higher when you are ready to sell it. Otherwise, you’ll be in very hot water. Also make sure that your investment product will allow you access to the cash you need when you need it – I’m talking about liquidity and cash flow here, because no one should find themselves at retirement in the position of being asset rich but cash poor.

Whose Advice Should You Follow?

Do you need to purchase something just because you’re hearing a lot about it on the radio, read about it online, in newspapers and magazines, or saw a slew of personality newscasters touting it in TV ads? Maybe, but maybe not. As always, I am not going to tell you what to do because I don’t know your specific situation. But please get this. You need to know where you are headed financially with crystal clarity! The only possible means by which you can make that happen is with a real plan that is crafted for you after a specific discussion with a real, down-to-earth, honest professional who knows what he/she is talking about. The alternative is to be in a state of confusion, vulnerability, and panic that makes you an easy target to be blown in whichever direction the financial press wind takes you.
Call my office today at 301.949.4449 or contact us electronically here to request a personal meeting with me and get your questions answered.

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