Gold vs CDs vs stocks: A portfolio framework fit for safety

When you’re building a portfolio, you have to protect yourself against two main risks.

“There’s the inflation risk, and then there’s the market risk,” says financial planner Diana Richey. “It’s a bit of a rock and a hard place.”

Richey says that investments like stocks are prone to market risk: If there’s a big market crash, your investments will likely go down along with it. But if you put all your funds in FDIC-insured accounts like CDs or high-yield savings accounts, then you’re going to struggle to outpace inflation and actually build wealth.

She says one way a safety-focused investor could build wealth is to focus on diversifying and create an “all-weather portfolio,” a term originally coined by billionaire investor Ray Dalio. Unlike a traditional 60/40 portfolio, which is made up of 60% stocks and 40% bonds, an all-weather portfolio has a mix of several different types of investments, including gold.

“That’s designed to get you through any economic situation that you might come across,” says Richey.

How a gold IRA fits into your portfolio

Investing a portion of your portfolio into gold can help diversify. Richey says that gold might also be helpful in case of economic decline.

“Gold has historically been a hedge against a slowing economy,” she says. Richey calls buying gold outright and storing it at home a “totally viable approach,” but you also have another option: a gold IRA.

Unlike buying gold to keep at home, gold IRAs allow you to reap the tax benefits of a retirement account while still owning physical goods.

Investors who choose to use a gold IRA for retirement will use a slightly different process from investing through a traditional brokerage. First, they have to choose a precious metals dealer. A dealer such as Goldco can help set up a gold IRA, buy the gold itself, coordinate storage (because you don’t keep a gold IRA at home), and navigate any fees.

Gold doesn’t earn interest like other investments might. What it does do, though, is maintain its value over time, meaning its purchasing power tends not to be diminished by fluctuations in the market.

That doesn’t mean gold is a perfectly safe investment. Like any asset in your portfolio, says Elias Friedman, a financial planner at Kadima Wealth, gold holds some degree of volatility. However, in a diversified portfolio, any volatility should be offset by your other assets.

Other investment options for your portfolio

Stocks

Stocks are individual shares of publicly owned companies; buying them represents owning a tiny fraction of whatever company they represent.

Stocks can offer high returns on your investments. They’re also very prone to market risk: A bad quarterly earnings report from a company can send its stock plummeting, and if the company closes down, all the money you invested in it is gone.

Most portfolios focused on long-term wealth invest money into a diverse collection of stocks. Investing diversely across multiple different industries is safer than investing all your cash into just one; that way, even if one industry you invest in is doing poorly, you’ll have other stocks to offset your losses.

Bonds

Bonds are a form of loan. When you buy a bond, you’re giving money to whoever you buy it from in return for some amount of interest over time. Each bond will have a term length (how long it will take for the bond to be paid back in full) and an annual interest rate.

You can also sell bonds before their term length is over if you need your money back quickly, but you won’t get the full return if you do.

You can buy bonds from companies or from the US Treasury. There’s more risk if you buy a bond from a company because there’s a chance it could fail before you get all of your money back.

US Treasury bonds tend to be very low risk, because it’s highly unlikely that the Treasury will default on your bond. In turn, returns on treasury bonds tend to be fairly low.

As a whole, bonds are a less risky, but also less lucrative, form of investment than stocks.

CDs

CDs work a lot like bonds — you lock your money into an account for a certain amount of time in exchange for a fixed interest rate — but they’re also FDIC-insured bank accounts. If the bank you open a CD with fails, your funds are federally insured up to $250,000.

CDs have the lowest level of market risk compared to stocks and bonds, but they also have the lowest returns. CD rates currently outpace inflation, but not by much. Historically, CD rates are often lower than inflation rates.

While no investment is perfectly safe, a well-diversified portfolio is a proven strategy to build and protect your wealth for the long term.