EDITOR NOTE: Countless financial advisors will tell you that you cannot achieve both capital preservation and growth at the same time. That’s because most advisors see the world according to two colors--stocks and bonds. Actually, make that one color: green. At any rate, don’t believe it. You can achieve both through one asset. Here’s how to do it.
At the end of September, six months after the onset of the “coronavirus crash,” around 12.6 million people were still out of a job, according to the U.S. Bureau of Labor Statistics. Watching the jobless claims numbers come in each Thursday morning, you probably noticed the numbers varying from week to week, sometimes beating analyst expectations, sometimes falling short of them. However, despite the minor variances, it appears unlikely that the employment situation is going to recoup enough jobs to get to pre-pandemic levels anytime soon.
Among those who’ve lost their jobs, many had employer-sponsored 401(k) plans. Fortunately, those have likely remained intact. The question (which I hear a lot as a senior partner of a firm that provides precious metals IRAs) is what can those folks do with their retirement plans, now that many may not be in a position to contribute to their plans, for one reason or another.
It’s About Growth And Capital Preservation
Can you achieve both portfolio growth and capital preservation — that is, grow the value of your assets (a more aggressive approach), while protecting them (a defensive approach)? Some financial advisors would say no. But many also operate within the narrow world of equity and debt securities. So, no, I don’t believe you can achieve growth and preservation if your choice is limited either to stocks for growth, or bonds and fixed income for preservation and yield.
But times have changed, rendering the stock and bond combo a little “old hat.” You see, unlike before the Covid-19 era, neither securities were under as significant a threat of erosion as they are now. Considering the Federal Reserve’s willingness to overshoot its 2% target so it can achieve an average of 2% inflation, and considering the Fed’s and government’s necessary yet massive monetary and fiscal spending in response to the pandemic’s economic ravages, it’s likely inflation is going to accelerate at a faster pace, weakening the value of retirement savings.
Remember that government spending is virtually a claim on future income because more money in the system often results in the dilution of its value over time. This applies to retirement funds, especially fixed-income investments, whose income may be nominally fixed but whose status of value decline is “fixed” as well. Just check any inflation calculator; notice how money never appreciates but always erodes. Hence, its direction down tends to be quite stable.
So, what might you do with your retirement funds now, given this situation? Well, you still want growth and capital preservation. Nothing’s changed. On one hand, you can pursue growth and income through stocks, dividend stocks and bonds. But there’s an alternative that might shield other dollar-denominated assets from erosion and that happens to provide growth as well: gold. (Full disclosure: Author holds investments in physical gold and silver.)
A Timely And Timeless Investment
Gold is popularly assumed to be a safe haven not only because it tends to rise during times of high inflation, but also because its intrinsic value — its worth based on physical, industrial and socially determined characteristics — has supported the yellow metal’s monetary status throughout history making it somewhat “timeless.” Sure, gold isn’t considered legal tender in many states, or perhaps even in certain countries. Yet many of the world’s central banks store gold in reserve.
On a practical note, considering the Fed’s pro-inflationary actions, gold is also a timely investment, as the dollar’s purchasing power will likely decline in the coming years.
As for your retirement account, you’ll likely want to continue pursuing both asset growth and safety, especially if you’re nearing the so-called retirement red zone. But how might you do it? One way would be to convert your employee-sponsored 401(k) plan to an IRA and allocate a portion of that IRA into gold.
Using A Precious Metals IRA To Protect Your Retirement Funds
Converting your 401(k) funds to an IRA can provide you with more flexibility in asset choices than keeping it in your employer-sponsored retirement plan. Maybe you want to buy individual stocks, bonds, real estate investment trusts (REITs) and funds that exceed the prospects offered by your current plan. Making this conversion has its advantages, but with it comes a great deal of responsibility — your own asset research and the occasional asset rebalance.
In addition to gaining a wider range of options, you also have the capacity to invest in precious metals as a safe haven. I’m not talking gold- or silver-backed exchange-traded funds. I’m talking about physical ownership.
Now, physical ownership isn’t for everyone, so I recommend exercising your due diligence. Ask your financial advisor what they think about gold. Just note that some financial advisors are viewing the economy from the perspective of securities, and for them, safe haven typically means bonds.
But whatever you decide to do, take your time, and take the long view. Like all investments, gold and silver carry their own market risks. In other words, gold and silver are also subject to price fluctuations over time: They can lose “dollar” value should the dollar strengthen. But in a diversified setting, assets benefitting from dollar strength may offset any loss of dollar value in precious metals. This is why it’s important to diversify your assets in the first place: to establish an internal hedge across all portfolio components. However, considering the looming inflationary environment, gold can be a strategic investment as both a growth asset and a means to preserving your hard-earned capital — two things that matter a lot when it comes to your retirement portfolio.
Originally posted on Forbes