No matter your financial goals, diversification is a key tenet to successful investing. By diversifying you can capture the benefits of different asset classes while mitigating the risks that come with putting all of your eggs in one basket.
Determining the right asset allocations for your portfolio is a personal choice and dependent on a number of factors, like your age, goals, and current financial situation. Regardless, diversifying your portfolio into multiple investments is an option for all savers.
Assets like stocks, precious metals, and cryptocurrencies are all used by savers for various reasons in their portfolios. Let’s look at each of these assets and how they stack up.
Saving with Stocks
Stocks have been a major part of retirement investing for decades. This asset class is highly liquid, making it easy to trade in and out of when needed. Additionally, almost all IRA accounts allow for stock investing as it is one of, if not the most common asset held in retirement accounts. Investors also flock to stocks for the investment returns. The stock market has consistently outpaced other asset classes. The average return for the market is about 10% per year before inflation.
Stocks do come with their own risks. These assets are subject to vicious market cycles that wax and wane periodically. During times of economic hardship, like that of the financial crisis in 2008-2009, stocks can lose money for investors for an extended period of time. The stock market doesn’t go through these periods often, but when it does, investors can see their net worth decrease by a large percentage.
Today, it is easier and cheaper to buy and sell stocks than ever before. The digital age has lowered the cost of stock trading, with more and more brokers offering commission-free trades and no-fee accounts.
Saving with Cryptocurrencies
A new and burgeoning asset class, cryptocurrencies are the latest way savers are looking to invest. Bitcoin got the ball rolling in 2008, and slowly more and more cryptocurrencies have come out of the woodwork, promising to be revolutionary tools for the internet moving forward.
One thing cryptocurrencies offer savers are assets outside of the traditional financial system. Because cryptocurrencies aren’t controlled by a single centralized entity, they are actually able to keep data more secure than traditional networks. They also can’t be manipulated by central banks or governments. For these reasons, many see cryptocurrencies as a good hedge against traditional assets.
The growth of the cryptocurrency market is being compared to the internet. At its current trajectory, the cryptocurrency market is akin to internet usage in 1999, meaning, this industry still has significant room for growth.
Yet, the volatility of cryptocurrencies creates wild price swings that can cause major portfolio losses in a matter of hours. Concurrently, there are hundreds of cryptocurrencies on the market, and without a full understanding of how each works, it is difficult to know the cryptocurrencies in which to invest. This creates a high-risk, high-reward scenario for savers.
Cryptocurrencies originally were only available for trading on individual accounts, but can now be found within cryptocurrency IRA products. This makes it easier than ever to hold these assets within retirement accounts.
Saving with Precious Metals
As some of the oldest investments in history, gold and other precious metals have stood the test of time. These assets have been used as forms of saving for centuries. Out of all the assets discussed, precious metals are the most stable and least volatile.
Thanks to the Taxpayer Relief Act of 1997, the precious metals options for saving in a retirement account expanded. Precious metals accepted into an IRA account now include:
When looked at over the long term, saving with precious metals is a hedge against not only stock volatility, but volatility in currencies as well. While it seems like fiat currency is worth the same on a daily basis, the purchasing power of the dollar has fallen significantly over time. Saving with precious metals helps you to maintain your purchasing power and sustain your wealth throughout the years.
Precious metals are also the only asset class on this list that are physical in nature. Unlike shares in a company or digital assets, precious metals are tangible, and therefore have value outside of investing. For instance, gold is used in dentistry and electronics, while palladium is used in fuel cells. Assets with uses outside of investing are likely to always retain a value of some kind.
All three asset classes are available for saving within an IRA or 401(k) account. Holding assets in these retirement accounts levels the playing field in terms of tax exposure. This means, whether you hold stocks, precious metals, or cryptocurrencies in your retirement account, your tax exposure will be the same.
For assets held outside of your retirement accounts, consider these tax implications:
- Stocks – While they are only taxed at the time of sale, dividends, spinoffs, and mergers can all create taxable events. You might owe taxes in a given year even if you don’t actively make a trade.
- Cryptocurrencies – Tax laws for cryptocurrencies are far from settled, and while they are taxed as property today, that could easily change in the future. Cryptocurrencies also are more complicated than their counterparts. For instance, events like airdrops (the free distribution of cryptocurrency tokens) and hard forks (a network splitting in two, resulting in two separate cryptocurrencies) will require you to pay taxes on your new crypto holdings even if you weren’t anticipating such an event to occur.
- Precious metals – Investing in precious metal ETFs or stocks creates the same tax events as any other stock. Physical metals, on the other hand, are taxed as collectibles through long- and short-term capital gains taxes. However, they are only taxed at the time of sale. This makes them the least hassle for long-term savers who don’t want to worry about complicated tax events.
Choosing Between Asset Classes
Diversifying across these and other assets is implemented by some to capture the benefits of each while reducing the risk exposure to an individual asset class. As you can see, these assets vary in their history, volatility, and taxes.
|Asset||History||Volatility||Taxes (outside of retirement account)|
|Stocks||400+ year history||Medium||Capital gains taxes|
|Cryptocurrencies||Very new and untested||High||Taxed as property|
|Precious Metals||2,000+ year history||Low||Capital gains taxes|
Fortunately, the Birch Gold Group lets you rollover an existing account into a self-directed precious metals IRA. This way, you can save with not only precious metals, but with stocks and cryptocurrencies too. Contact a Birch Gold Group Precious Metals Specialist today to help you get started in building a well-diversified savings portfolio.