Creating wealth through investing requires an effective strategy that combines returns and profits with protection of capital. Many beginners make the mistake of thinking that smart investing is all about avoiding losses. Even investment gurus like Warren Buffet end up facing losses on their investments.
The trick to sensible investing is to focus on keeping losses as low as possible, and the simplest and most elegant way to hedge your risks and minimize scope of huge losses is to invest in precious metals through gold ETF, precious metal ETF, gold mutual funds, and precious metal mutual funds.
Why Precious Metals?
Investing in equity is a high-risk affair where you can either generate huge returns or can end up losing your entire capital. To hedge your risks, you will require an asset class that fulfills the following conditions:
• Reasonable returns over the long run.
• Protection from losses even when the economy does poorly
• Good liquidity so that you can convert your investment back into cash without any hassles
• Inherent value that will safeguard your investment during major economic troubles.
A look at asset classes other than equity, like debt securities like debentures, real estate, bonds, etc. shows that there is only one asset class that fulfils all the above-mentioned conditions---precious metals.
Shares, bonds, debentures---these are paper assets that derive their value from other underlying assets. Precious metals like gold and silver, on the other hand, have inherent value due to their scarcity. Between 1970 and 2016, gold has generated real inflation-adjusted returns of 3.7%. The period from 1980 to 2016 yields a loss of just 1.5%. While you may not earn blockbuster returns, you are assured that you won't lose too much either.
Finally, gold is probably the most liquid asset in the world. Shares of blue-chips of yesteryears may find no buyers today. Your land assets may appreciate in value but selling a parcel of land or a home can take a lot of time. Ever heard of a situation where somebody wanted to sell gold or silver but could not find buyers? There is your answer.
How to Invest in Precious Metals? Why Precious Metals ETFs?
Adding gold, silver, platinum, or palladium to your investment portfolio is a smart decision irrespective of whether you are a high net-worth individual with lots of money or an average Joe looking for a smart investment strategy. And the smartest way to invest in precious metals is to do it through ETF (Exchange Traded Funds) or Mutual Funds.
Buying physical units of gold, silver, or any other precious metal is not a smart move. A ten-gram gold bar will be just 2 cm in width and 3 cm in length. So easy to lose, right? Secondly, having physical silver or gold in your home will lead to inevitable security risks. You will have to buy a safe, install an alarm system, get insurance, and spend a lot to safeguard your investment. Finally, selling your gold investments won't be easy either since your options will be restricted by practical issues like transporting the gold to the buyer and other hassles.
Option 1 ---ETF
A precious metal ETF is like a share issued by a company with the difference that one unit of an ETF will represent 0.5 grams to 1 gram of the precious metal. So, you will end up owning 10 grams of gold or silver if you buy 10 units of a gold or silver ETF. The company issuing the ETF units will hold the physical gold or silver on behalf of all investors buying units of the fund.
As you can see, buying units of the gold ETF or a precious metal ETF is like buying gold, except that you need not worry about storing it, keeping it safe, or issues like transportation. The price of your units will increase as gold prices rise. You can sell the units on the stock exchange and recover your investment and profits whenever you wish.
Option 2--- Precious Metal Mutual Fund
Another option is to buy units of a Gold mutual fund or precious metal mutual fund. A unit of a gold mutual fund will represent units of gold ETF's, which, in turn, represent units of physical gold. So, if you want to invest in different precious metal ETFs at once but don't want to buy units of each ETF individually, you can opt for a precious metal mutual fund where a professional manager will allocate funds to different ETFs to maximize returns.
A precious metal mutual fund offers advantages like active professional management, greater risk management, and greater choice as compared to a precious metal ETF. However, the cost of investing in a gold mutual fund will be higher than simply buying units of a Gold ETF.
Just as equity investors can either buy shares directly or buy units of mutual funds that derive their value from equity investments, precious metal investors can choose to buy ETF units, which represent units of the physical metal, or mutual funds, which ultimately invest in ETFs.
Benefits of Precious Metal Investments
Buying ten grams of gold every month may be something that a high net-worth individual can consider. However, such an investment strategy may be beyond the reach of somebody who wishes to invest a few hundred dollars every few months into precious metals.
Buying units of a precious metal mutual fund or a gold mutual fund will enable all kinds of investors---big and small---to include gold, silver, and other valuable metals into their portfolio. The defensive nature of precious metals makes it a very good option for long-term financial plans like one's retirement, children's education, or even a second honeymoon at the age of 60 years.
You can make periodic investments, buy a few units every once in a while, minimize risk of huge losses during bad times, and enjoy decent profits when the going is good. Considering the benefits, you stand nothing to lose and virtually everything to gain by putting money into a gold ETF, a gold mutual fund, or in a precious metal ETF or mutual fund.