Gold has been a valuable asset throughout much of recorded human history, and today, it gives investors protection against volatile markets. On the other hand, the Standard & Poor’s 500 Index (S&P 500 for short) helps investors keep a finger on the pulse of the stock market, offering particular advantages and challenges to consider. Both the S&P 500 and gold are regarded as strong long-term investments, but which is best for your portfolio?
Investment 101
Published: August 3, 2022
Gold has been a valuable asset throughout much of recorded human history, and today, it gives investors protection against volatile markets. On the other hand, the Standard & Poor’s 500 Index (S&P 500 for short) helps investors keep a finger on the pulse of the stock market, offering particular advantages and challenges to consider. Both the S&P 500 and gold are regarded as strong long-term investments, but which is best for your portfolio?
At its basic level, investing entails putting money into a project for profit, or “appreciation” in investment-speak. The goal is to maximize gains while minimizing risks. Funding a startup business, purchasing real estate, and buying stocks are all forms of investing.
Investing is not a get-rich-quick scheme. It is a long-term process that requires careful observation of market behaviors, planning, and developing an instinct that separates the waders from the swimmers.
Because investors should always be aware of the possibility of losing everything, it is wise to have a contingency plan. Those unaccustomed to thinking far ahead may want to channel their hard-earned money elsewhere. Even so, throwing one’s hat into the stock market ring provides ample opportunities for growth on many levels.
Investing in the modern sense began in the early 17th century with the establishment of the Amsterdam Stock Exchange. Its existence grew out of a need among European financiers to make the most of their trade activities in a safe and controlled manner. They were at the mercy of independent regional authorities without such a hub to broker their transactions.
In 1792, the New York Stock Exchange officially opened its doors to public trading. Before that, people engaged in large-scale financial activities that had no standard of conduct to follow. A lack of trust in the market quickly began to grow. The NYSE set out to change this by regulating trade and commerce to give investors greater confidence.
The prosperity of the first and second Industrial Revolutions led to a boom of self-made business tycoons and, by extension, big-name banks like J.P. Morgan and Goldman Sachs. More people than ever had the capital to play around with, and the prospect of making money from money was undoubtedly music to the ears of early investors.
The art of investing continued to develop throughout the 20th century, giving rise to concepts like portfolio theory and risk management. Other investment channels followed suit, including hedge funds, venture capital, and exchange-traded funds (ETFs). Then, with the introduction of the internet, online trading and investment research became possible, allowing the general public to dip their proverbial toe into the market.
You might think it necessary to be wealthy to invest, but you can grow your money just as well by putting in small amounts. There are plenty of affordable stocks to purchase, and most employers offer some form of a retirement savings account that allows you to deposit a percentage of each paycheck into an investment account.
Investing grows money over time through the success of the company. As companies increase their profit and revenue, investors are rewarded with higher share prices. The larger the company’s success, the higher the share price.
You’ve probably heard success stories of people buying Microsoft or Amazon stock in the early years while their share prices were low and receiving massive returns from a relatively tiny investment. If you do the proper research and play your hand wisely, you could multiply cash that would have been sitting in your bank otherwise.
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The S&P 500 Index assumed its current name in 1957, though its foundations go back to the 1920s. Since then, it has grown to become the most significant yardstick for measuring stock market performance in the United States due to its diversity and depth. Many funds track the S&P 500, allowing everyday stockholders to invest in its listed companies.
The S&P 500 Index features the top 500 publicly traded companies on the New York Stock Exchange and NASDAQ. The index determines the weight of each company according to its relative market capitalization (a.k.a., market cap), which is the value of the company’s shares on the stock market.
The S&P 500 is the most popular stock market tool among financial professionals because it covers 80% of the U.S. market. Its reach is greater than the Dow Jones Industrial Average, though it does have the downside of being weighted toward stocks with higher market caps.
You cannot invest in the S&P 500 itself, but you can invest in mutual funds and ETFs that track the index. This option allows you to put your money toward the biggest companies in the U.S. without having to scope out the best stocks.
Despite exposure to hundreds of companies by investing in an S&P 500 fund, it’s best to diversify your portfolio to defend against market volatility. When you invest in a fund, you won’t control which stocks you put your money toward. However, because the accounts tend to be passive, the entry costs are relatively low.
Since its inception, the average annual return (AAR) of the S&P 500 Index has hovered between 10.49% and 10.67%. However, this doesn’t mean investing in the index guarantees an excellent return. If you enter when prices are high or exit when they’re low, you won’t see returns on par with the average.
Inflation also tends to affect returns negatively. Because the index is so diverse, including companies from many industries, gains in specific sectors can offset other declines. You’ll typically get better results investing in an index fund than buying individual stocks.
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The S&P 500 Index weighs each company by float-adjusted market cap, and the value fluctuates throughout the day while the markets are open. The index multiplies the number of shares available on the market by the company’s share price to calculate the total value of each company’s outstanding shares.
Because companies with higher market caps weigh more heavily in the S&P 500, their share prices tend to affect it far more than companies lower on the list. The index’s top 10 companies make up 30% of its value.
The value of the S&P 500 Index reflects the state of the stock market and the U.S. economy, so changes in price influence investor sentiment and vice versa.
Gold has a reputation for rising when traditional asset classes fall, making it a popular alternative to investing in funds that track indexes like the S&P 500. Its stable value makes it a safe addition to an investor’s portfolio. In times of volatility and market crashes, gold can be a valuable backup when cash loses value.
However, gold does come with some caveats. As a physical asset, it requires extra costs for storage and insurance. Seemingly separate from the influence of traditional markets, the price of gold can sometimes be volatile. For this reason, investors include gold as part of a diverse portfolio to hedge against market crises and inflation.
Franklin D. Roosevelt passed the Gold Reserve Act of 1934 to stabilize the U.S. economy during the Great Depression. A year before, Roosevelt banned hoarding gold coins and bullion, requiring citizens and businesses to surrender their gold to the Federal Reserve in exchange for fiat currency.
After the Gold Reserve Act, the price of gold became fixed at $35 until 1971, when Richard Nixon ended the conversion of U.S. dollars into gold. Since then, the price of gold has appreciated more than 5,000%.
Once it became legal to own and trade in gold again in the 1970s, people could purchase gold as an investment. The South African gold coin known as the Krugerrand was the first coin produced solely for investment purposes, giving investors a vehicle for private gold ownership.
Another factor that had a hand in influencing gold’s perception as an investment is the World Gold Council. The WGC promotes the demand for gold and continues to have a significant influence on the precious metal market. It established the first gold ETF in 2004.
There are several options with varying degrees of risk for those interested in gold investing. Popular types of gold investment include:
Investing in gold bullion gives you a more direct line to the price of gold and is a physical asset you can hold on to. However, extra fees may be associated, including premiums and storage costs. The safest and easiest way to invest in gold for the average person is through ETFs and mutual funds focusing on precious metals.
Gold has retained value throughout history, making it a viable hedge against inflation and declining markets—still, the price of gold changes with factors like supply and demand, inflation, and ETFs. Gold prices increase when economies worsen from geopolitical issues or global health crises.
Get A Free Gold Coin When You Open A Gold IRA Account
Get a free gold coin when you open a Gold IRA. Act now while supplies last.
While the value of gold has appreciated drastically since the 1970s, critics say the returns are typically less than a long-term, compounding investment in an S&P 500 Index fund. However, gold has historically had more gains than the S&P 500 Index, so many investors believe investing in gold has more potential for higher returns.
Due to the 2008 recession and the COVID pandemic, S&P 500 returns have been underperforming compared to gold. Stocks tend to have a lower value than gold during economic crises. On the other hand, gold prices rise with demand during tumultuous times as investors try to protect themselves from inflation.
The simple answer is “no.” The value of gold and the S&P 500 Index fluctuate individually, and the timing of your investment will have the largest impact on returns.
To determine if investing in gold or stocks is better suited for you, you should calculate the S&P 500-to-gold ratio. The lower the ratio, the more expensive gold is than the S&P 500. The higher the ratio, the more inexpensive gold becomes.
The ratio helps you spot when gold is overvalued or undervalued, letting you know when it’s a smart time to buy or sell physical gold.
While there is no direct yes or no response to know whether gold or the S&P 500 index is better, there is an answer to know which investment strategy is best for you. The experts at Noble Gold Investments are here to guide you on how to purchase gold coins, silver coins, and other precious metals in your IRA.
Our team offers a free gold investment guide and one-on-one investment planning assistance to help you maximize your return. Plan wisely for retirement and open an account with Noble Gold Investments today; there’s no time like the present to begin planning for your future and begin saving for your future!
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