Gold vs. Stocks

Gold and stocks are two of the most popular investment options available. Gold can be appealing because it is a relatively stable asset with intrinsic value. Stocks can diversify your portfolio, but they can also be volatile. Our gold vs. stocks comparison will help you decide which investment best aligns with your goals and risk tolerance. 

Understanding Gold as an Investment

Gold has been valued as a store of wealth for centuries. You can purchase it in several forms, including coins or bullion. You could also invest in a gold individual retirement account (IRA). These provide tax-deductible contributions or tax-free distributions, depending on the type of IRA (traditional vs. Roth) in which you enroll. 

One of the key motivators for investing in gold is diversifying your portfolio. Gold prices may hold or even increase when volatile markets or currencies lose value. However, gold investment returns tend to be minimal. You won’t receive dividends on your investment, so you can’t use gold to generate passive income. 

Pros and Cons of Gold Investment

You must become familiar with the advantages and disadvantages of investing in gold before pouring hundreds of dollars into gold coins or bullion. Here’s a quick look at gold investing pros and cons:

Pros

• Stability during times of economic uncertainty
• Reliable store of wealth
• Convenient storage options, such as gold ETFs 

Cons

• Doesn’t pay dividends or generate income
• Involves storage costs (if holding physical gold)
• No tax benefits when purchasing physical gold 

Understanding Stock as an Investment

Stocks represent ownership in a publicly traded company. Every time you purchase a share of stock, you become a part-owner of that company. As the company grows, your stock can appreciate. 

Many businesses also offer dividend payouts, which are a portion of the company’s profits paid out to shareholders. If you develop a large portfolio, your dividend payouts could provide passive income. 

Stocks and transactions involving stocks are also tightly regulated by the Securities and Exchange Commission. This regulated nature can offer you protection and peace of mind when investing. However, it's important that you carefully research brokerage platforms and individual stocks before investing your money. 

There are numerous ways to invest in the stock market. You can buy individual stocks, giving you direct company ownership. You can also invest in an exchange-traded fund (ETF). ETFs pool together multiple stocks and diversify portfolios across different companies and sectors. 

Diversification is vital. For instance, if you’re interested in tech companies and 90% of your stocks come from the same tech niche, your portfolio could suffer huge losses if that sector faces a downturn. However, if your portfolio was diversified across multiple industries, a downturn in one sector would have less impact.

Pros and Cons of Stock Investment

Here’s a look at the advantages and disadvantages of stock investments:

Pros

• High potential returns
• Dividend payouts
• Gain partial ownership in companies 

Cons

• Significant price fluctuations
• Require extensive market research
• Returns are tied to company performance

Comparing Gold vs. Stocks

Gold and stocks offer unique benefits and potential drawbacks, so it's important to consider how they fit into your overall investment strategy. Here are the four primary factors you should consider: 

Return on Investment

Stocks tend to offer higher short-term returns. However, certain stocks can also be more volatile and are susceptible to market downturns. 

It’s important to note that the historical returns of gold and stocks have been relatively similar. This becomes especially apparent when comparing the precious metal to the S&P 500. Like gold, the S&P 500 is known for providing steady – if sometimes modest – returns over the long term. 

Over the last 20 years, gold has increased in value by more than 490%. The S&P 500 increased by 402% in the same time frame. However, a different picture emerges when you focus on the last five years. Recently, the S&P 500 has slightly outpaced gold, with a growth rate of 86.3%. Gold experienced a value increase of 72% during that span. 

Level of Risk

Stocks come with higher risks than gold due to their volatility. Economic changes and market swings can drastically reduce the value of your shares. You also have to worry about individual company performance. If a business struggles, its stock is going to lose value. 

Gold offers lower risk, especially during economic uncertainty or high inflation. In other words, it tends to hold its value. For precisely this reason, many investors use gold to hedge against inflation. 

Holding Period

Gold is better suited as a long-term investment. It’s often used to preserve wealth rather than generate quick returns. You’ll need to hold onto your gold for years or even decades to realize meaningful gains. 

Stocks can provide both short-term and long-term value. Short-term traders capitalize on market timing and frequently buy and sell shares to profit quickly. Long-term investors tend to prioritize companies with a proven track record of success. Buying shares in industry stalwarts can bring steady, long-term returns. 

Dividends

Stocks have a clear advantage when it comes to dividends. Dividends can provide you with recurring passive income. Your dividend payouts will vary based on how many shares you own in a business and how successful that entity was during the previous quarter. 

Gold doesn’t pay any dividends. You will only make gains when you sell the asset. 

Which Asset Better Fits Your Portfolio?

Gold could be a solid choice if you’re looking for long-term stability and a hedge against inflation. If you’re seeking higher returns and are comfortable with more volatility, stocks might be a better fit for your portfolio. 

Before purchasing shares, thoroughly research any companies or ETFs to ensure that the asset is a good match for your risk tolerance. Over time, it can be beneficial to include both precious metals and stocks in your portfolio to mitigate risks and effectively diversify your investments. 

Frequently Asked Questions