One investment with 649 per cent return

This investment has seen unimaginable returns but paying into it isn’t as simple as you may think - and there’s an obvious downside.

From January 1, 2000 until today, the price of gold has increased by over 649 per cent, capturing the attention of a heap of investors.

But for anyone who hasn’t invested into gold in the past, knowing whether it’s a smart move and how to actually get started can be overwhelming. I want to cover the key things you need to know about investing into gold, so you can figure out if this is the right investment move for you.

Why invest into gold?

The first and most obvious thing that comes to mind is the huge uplift in the value of gold in recent years. This growth can easily capture your attention, but ultimately it’s worth keeping in mind how gold compares with other investments.

The most relevant alternative to compare the returns of gold against is buying shares. It’s worth noting that over the long term shares have also performed strongly, with the S&P500 (the 500 largest stocks on the US stock market) up by 185 per cent over the same time period from January 2000.

Further, there have been other periods where shares have performed much more strongly than gold, for example since 2010 the price of gold has increased by 42 per cent while shares have increased by over 262 per cent over the same period. This suggests that while gold has performed well over the long term, other investments have also made investors a heap of money – sometimes even more money.

Gold bullion bars after being inspected and polished at the ABC Refinery in Sydney. Picture: DAVID GRAY / AFP

Another big advantage of investing into gold is that it tends to move differently to the sharemarket. Specifically, when shares go down through a large market correction or crash, gold tends to increase in value. This means for an investor with both shares and gold in their portfolio, their overall investment return is less ‘volatile’.

What are the risks?

One of the main downsides of buying gold is that it typically doesn’t generate any income, meaning you can have a large investment that is ‘unproductive’. When you buy shares, you own a small slice of a company and are entitled to a small slice of the company’s profits, which are paid out to shareholders in the form of dividends.

With gold, because you ultimately own a piece of metal there is no income on your investment, meaning your only lever for financial upside is when the price increases over time. The implication here is that you don’t actually receive any financial return from a gold investment until you sell.

This means gold is not a good investment for someone that’s looking to build a second passive income from investments, a goal of many investors.

Gold doesn’t provide a second income.

Another risk that comes with investing into gold is ‘volatility’ risk. Volatility is another way of saying ‘ups and downs’ that prices of all investments experience over time as markets move. With gold, there can be much bigger price swings in short time periods compared to other more traditional investments. Sometimes this works in your favour when gold prices are going up, but on the flip side it can work against you when prices are going down, and either way it can be a stressful ride.

Also, if you’re looking to buy gold you ultimately want to own a gold bar (or at least a small slice of one), so you need to think about how you will actually buy your gold and how you will ‘manage’ it.

Two main ways people invest into gold.

First, you can buy physical gold. This means you’ll hold the physical gold, and need to either store this yourself or pay someone to store it for you. This option can come with some costs and risk, you don’t want to go losing your gold brick or have it stolen. This option can also come with some challenges if and when you want to sell your gold, as you will need to physically exchange your gold with someone else in exchange for money.

It’s possible to buy gold bars but storing them can be complicated.

Second and more popularly in recent years, you can buy gold through an ETF (exchange traded fund) or managed investment fund. This means you’ll have a professional fund manager and gold buyer that will source your gold, store it, and manage all of the administration and investment and tax reporting on your gold investment.

A big advantage of this option is that there is an active public market for your investment, meaning it’s easy to buy and sell, and your gold investment can be bought and sold in small parcels.

The wrap

With all the noise in investment markets today, along with exotic investments becoming more and more accessible, many investors and wondering if they should be spreading their investments away from traditional stocks and shares. With the run in gold prices over the last handful of years, more and more investors are including gold in their holdings.

But it’s not all upside. There are some key risks to consider and downsides that need to be carefully managed if you’re going to invest into gold, so do your research and plan smart before you jump in.

Ben Nash is a finance expert commentator, financial adviser and founder of Pivot Wealth. Ben is the creator of the Smart Money Accelerator program that helps people build a second income investing faster.

Ben is also the Author of the brand new book, ‘Replace your salary by Investing’ and the host of the Mo Money podcast, and runs regular free online money education events, you can check out all the details and book your place here

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.