Investing in Gold vs. Stock Market

If you are thinking about diversifying your investment portfolio, you may be thinking about investing in gold or the stock market. Each option can offer different benefits and risks. Gold is commonly seen as a safe haven asset, particularly during times of economic uncertainty, while the stock market is often viewed as a path to grow wealth over time.

If you want to build an investment portfolio, a financial advisor can help you analyze and manage different options.

Differences Between Gold and Stock Investments

Comparing the differences between gold and stocks can help you make informed decisions that align with your financial goals. Here are some things to consider when deciding to add either to your portfolio:

Potential Returns

Gold has historically provided modest investment returns, often seen as a store of value rather than a growth asset. Its prices can appreciate during economic uncertainty or geopolitical tensions, providing a hedge against market downturns. However, over the long term, gold’s annual return typically lags behind that of stocks.
Stocks represent ownership in companies that have the potential to grow and generate profits. Historically, the stock market has delivered higher returns than gold. This growth potential makes stocks a favored choice for long-term investors seeking capital appreciation. While stocks can be volatile in the short term, they offer substantial gains over extended periods.

Risk Level

Gold is generally considered less risky compared to stocks. Gold’s value tends to be stable and can even rise during times of economic instability or inflation, making it a safe haven for investors. It is less affected by economic cycles and market fluctuations, providing a cushion against market downturns.
Stocks are inherently riskier. Their value is influenced by a variety of factors including company performance, economic indicators, and market sentiment. This can result in significant price volatility. However, this higher risk is compensated by the potential for higher returns.

Dividend Earnings

Gold does not offer any dividend earnings. Its value relies solely on price appreciation, and it does not generate any income while held. This makes gold less attractive for investors seeking regular income from their investments.
Stocks offer the potential to earn dividends. Dividends are periodic payments made by companies to their shareholders from their profits. These payments provide a steady income stream and can significantly enhance total returns on a stock investment. Dividend-paying stocks are particularly attractive to income-focused investors.

Tax Implications

Gold is considered a collectible by the IRS, which means the capital gains taxes on your gold could be subject to a maximum tax rate of 28% if held for more than one year. Short-term gains on gold, held for less than a year, are taxed at ordinary income tax rates. Gold ETFs and mining stocks are taxed similarly to other securities, with long-term capital gains rates applying if held for more than a year.
Stocks benefit from more favorable tax treatment. Long-term capital gains on stocks, held for over a year, are taxed at lower rates of 0%, 15%, or 20%, depending on income levels. Short-term capital gains, for stocks held less than a year, are taxed at ordinary income rates. Additionally, qualified dividend tax rates are the same as long-term capital gains rates, providing further tax efficiency for stock investors.

When Should You Choose Gold?

When assessing whether to invest in gold, consider the timing. Gold is particularly appealing during periods of economic uncertainty or high inflation, as it often holds or increases its value when other investments may falter. For example, gold prices went up as investors looked for safe-haven assets during the 2008 financial crisis.

Adding gold to your investment portfolio can serve as a hedge against inflation and economic downturns. It provides diversification because its price movements are generally uncorrelated with those of stocks and bonds. This characteristic makes it a strategic choice for those nearing retirement who wish to protect their savings from volatility in traditional asset classes.

A typical gold investment portfolio might include a mix of physical gold, such as bars or coins, and gold-backed financial instruments like ETFs or mutual funds. For someone looking to invest 10% of their portfolio in gold, this could mean purchasing a few gold coins and investing the remainder in a gold ETF that tracks the price of gold, offering both security and liquidity without the need for physical storage.

When Should You Invest in the Stock Market?

The stock market is generally suitable for long-term investment strategies, especially during economic stability when the potential for growth is higher. For example, if you’re saving for retirement and it’s years away, the stock market’s potential for appreciation and dividends could be beneficial.

In contrast to gold, which is often favored during economic uncertainties for its stability, the stock market offers opportunities during both dips and rises. A strategy like buying during dips can maximize returns over time if managed properly.

A typical stock market portfolio might include a diverse mix of individual stocks, mutual funds and ETFs across various sectors and regions. If allocating 50% to stocks, you might choose stable blue-chip stocks, high-growth potential stocks and sector-specific ETFs to balance risk and reward. This contrasts with a gold investment’s focus to preserve value during volatility.

Bottom Line

Two investors comparing gold and stock investments.

By combining gold and stocks, investors could achieve a more balanced and resilient portfolio. Gold provides a counterbalance to the inherent volatility of investing in stocks, reducing overall risk. In times of market stress, gold can mitigate losses from declining stock prices, ensuring more stable returns. This complementary relationship between gold and stocks can enhance portfolio diversification, helping investors achieve their financial goals with greater confidence and stability.

Investment Planning Tips

A financial advisor can help you create an investment portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to see how much money your investment can earn over time, SmartAsset’s return and growth calculator can help you get an estimate.