Is Using Your 401(k) To Invest in Gold a Smart Way To Use Your Retirement Savings?

What is the best investment strategy for your 401(k)? Finance experts have different opinions, but one question they may be getting more frequently of late is whether gold is a viable investment vehicle.

The answer is mixed, and partly depends on your age, but in general, you might want to be extra careful when pouring your retirement fund — or a hefty portion of it — into this precious metal.

I’m a Self-Made Millionaire: Here Are 5 Stocks I’m Never Selling
Find Out: 3 Ways To Recession-Proof Your Retirement

The Long-Term Return Rate of Gold Is Pretty Lousy

Robert R. Johnson, PhD, CFA, CAIA, professor of finance at Heider College of Business, Creighton University, is extremely wary of gold as an investment vehicle, finding that its long-term returns are far below those of equities.

“At the end 1925, the price of an ounce of gold was $20.63,” said Johnson. “At the end of 2022, an ounce of gold sold for $1,813.75. Over that 97-year period, the precious metal returned 4.72% compounded annually. Over that same time period, according to Ibbotson Associates, the compound annual rate of return of a diversified portfolio of large stocks (the S&P 500) was 10.1%. That same $20.63 would have grown to $1,031,226 at the end of 2020.”

I’m a Financial Advisor: Here’s How Often You Should Check Your Retirement Account Balance

It’s Best Used in Small Doses

Gold may not be an ideal investment vehicle for your 401(k), but in small doses, it has its positive effects, at least in the very near future.

“Having a small position in precious metals may dampen portfolio volatility in the short-run,” Johnson said.

But this may not be enough of a good reason to support investing in gold with your retirement savings. “The tradeoff between slightly dampened volatility and the lost long-term return is certainly not a prudent one, particularly for Gen Z/millennials with long investing time horizons,” Johnson said.

Gold Is Speculative

Johnson went on to explain that gold is a speculative investment, based on the Greater Fool Theory. What does this mean?

Story continues

“The price of gold is not determined by its intrinsic value but simply by its expected selling price to someone in the future,” Johnson said. “But, don’t listen to me, listen to Warren Buffett, who in 2011, when meeting with students at the CFA Institute Research Challenge, explained his rationale concerning gold as an investment as follows: ‘The world’s gold stock is about 170,000 metric tons, which, if melded together, could create a cube of about 68 feet per side; the cube would be worth about $9.6 trillion.’”

Let’s put that in perspective.

“For that much money, one could buy all the crop land in the United States, purchase 16 ExxonMobils and have about $1 trillion of walking around money left over,” Johnson said. “[Buffett] asked the students which one they would rather have. He also noted, ‘You can fondle the cube, but it will not respond.’”

Gold Could Be a Bad Idea If You’re Far Out From Retirement

If you’re at least several years away from retiring, investing your 401(k) funds into gold is a risky move.

“I am not a proponent of using 401(k) funds to invest in gold — especially if you are several years away from retirement,” said Thomas Brock, CFA, CPA, an expert contributor for Annuity.org. “The opportunity cost is simply too great. Gold does not yield any income, and over long periods of time, the precious metal tends to significantly underperform growth-oriented assets, such as stocks and real estate.”

Interestingly, it is the younger generations — those who should be wariest of gold — who are often the most bullish on it. They have this in common with their ancestors who went through the turmoil of WWII.

“Gen Z/millennials and the WWII generation have a proclivity to invest in precious metals,” Johnson said. “While that may seem unusual, both generations were shaped by cataclysmic financial events in their formative years — the WWII Generation with the Great Depression and Gen Z/millennials with the Financial Crisis.”

The economic repercussions of the COVID-19 pandemic have highlighted gold as a worthy investment vehicle — to millennials, in particular.

“Most recently, millennials were influenced by the coronavirus pandemic and the disruptions that caused the financial markets to endure,” Johnson said.

It’s a Better Idea If You’re About To Retire

If you are on the cusp of retirement or drawing down on your savings, maintaining a modest allocation to gold– 5% to 10% — could be a smart move.

“Historically, this asset class has exhibited a high degree of resiliency during recessionary periods, while providing a nice diversifying benefit to portfolios of stocks, bonds and cash. It has also held up well during prolonged bouts of high inflation,” Brock said.

Stick With What Is Proven To Work

Gold is just a little too dicey to sit comfortably with some finance experts, who may prefer stocks to gold, if deciding between the two.

“There is an old Wall Street adage, ‘You can sleep well or eat well,’” Johnson said. “You will sleep well if you commit funds to low-risk investments like money market funds or Treasury Bills, but your investments will not grow substantially and may even have trouble keeping pace with inflation. You will eat well by consistently investing in stocks.”

No Matter What You Do, Diversify!

Whether you put some of your 401(k) into gold or not, it’s very important to diversify your portfolio. So don’t only pick stocks.

“It’s vital to spread your investments and savings out among multiple assets and investment vehicles to manage risk more effectively,” said Ben McLaughlin, U.S. president at Raisin. “Diversification may help your portfolio weather financial storms, because if one asset is doing poorly, another might still be doing well, so you have better stability for your financial future.”

More From GOBankingRates

This article originally appeared on GOBankingRates.com: Is Using Your 401(k) To Invest in Gold a Smart Way To Use Your Retirement Savings?