07/25/2013 11:23 am ET Updated Sep 24, 2013

Investing in Gold: It Might Pan Out

It might seem patriotic to invest in gold, and it's certainly popular among SaveUp users. The gold bar on SaveUp is one of the most frequently suggested and played for prizes. So, should you invest in gold? I've been asked this question by clients, friends and family. The short answer is, "possibly." Of course, a complete answer is more nuanced. In my opinion, it is generally appropriate to hold as a small percentage in a well diversified portfolio. For instance, no more than 5 percent but usually a lower percentage, where gold is a component of a mutual fund that invests in a number of commodities.

Gold has performed handsomely in the past few years despite recent dips. Some would call this a bubble. Others might argue it is a safe investment during a recession. In my opinion, part of what has made gold so popular of late, is our human propensity to chase returns. Also, our bias to remember events from the recent past (vs. taking a historical perspective) affects our decisions as well. It is important to keep in mind that there is no guarantee that past performance will reflect future performance.

However, that doesn't mean that owning gold shouldn't be part of a broader investment strategy. From my perspective, it simply means that gold, or any other investment for that matter, shouldn't be viewed as a sure thing. If we look at historic returns, no one type of asset always outperforms or underperforms the others. Therefore it is unwise to think gold would always continue to perform well going forward.

This chart shows how different asset classes perform from year to year. One asset class that is compared is commodities, which include gold.

If you could guess when gold would "win" you could do quite well, but even professional money managers don't pick winners consistently. Any concentrated holding, whether it be gold, real estate, or company stock carries a greater risk than a diversified portfolio. That is why I recommend owning a wide variety of assets in a portfolio that is systematically rebalanced. This difference in approach was recently covered in this Wall Street Journal article titled, "The Great Gold Divide: Which Side Are You On?"

Remember, your portfolio is not your financial plan. I've seen a tendency for a hyper focus on investments. And yes, they are an important component of personal finance. However, a solid financial footing means much more than an investment portfolio. Creating a meaningful plan also includes things like: establishing life goals, managing risks, tax and estate planning. Consider gold as part of a diversified portfolio and be sure to create a broader personal financial plan so that you can continue to SaveUp!

This post was written by SaveUp's personal finance contributing writer, Catherine Hawley, CFP.