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Gold-related mutual funds can provide added diversification to a well-rounded portfolio. These specialty funds invest in the stocks of companies that mine, process, fabricate and distribute gold and may invest in other precious metals or gold itself.
Gold funds tend to move independently of the stock and bond markets. Part of the reason for this is that gold is considered to be its own asset class - separate from stocks, bonds and money market securities. So if you include a gold fund as a small component of a diversified portfolio, you could help balance your overall portfolio risk since the fund typically will not perform in tandem with the broader markets, although diversification cannot ensure against loss.
Generally, gold funds may perform well when other asset classes aren't performing as well or may have long periods of lagging performance when other asset classes are in favor. The prices of gold and gold-company stocks themselves tend to be very volatile. Gold's price can be affected by supply and demand, international economic changes and world political events. This price volatility and narrow concentration make gold-related funds higher risk investments than broad-based mutual funds.
A gold-related fund typically should represent about 5% of a diversified portfolio because of the narrow focus of its investments. While it might be tempting to try to time the market and invest in a gold fund when gold appears to be in favor, it's best to consider such a fund as a long-term investment to diversify a broader portfolio. Many fund companies emphasize the importance of this long-term view by adding redemption fees to gold-related funds. Investment management companies charge these redemption fees if you sell your fund shares within a certain time frame after purchase, often 60 days. The average redemption fee is 1.6%.*
Historically, shares of gold company stocks have tended to move two to three times as much as changes in the price of gold. So if the price of gold increased by 1%, for example, gold stocks tended to increase 2% to 3%, which could have helped increase the value of a gold fund's assets. The reverse also is true. If the price of gold decreased by 1%, gold stocks tended to decrease 2% to 3%, and gold fund assets declined accordingly. Past performance, however, is not a guarantee of future results.
By investing in a gold-related fund, you receive the benefit of professional money management and the convenience of investing in one fund in which portfolio managers regularly track the gold market. The minimum investment for gold funds typically ranges from $1,000 to $5,000 but can be higher, depending on a fund's requirements.*
A gold-related fund can help provide a hedge against inflation. Historically, gold has held its value better than the dollar, which can help maintain the value of your portfolio. The dollar loses value, or its purchasing power, when inflation increases and gains value when inflation decreases.
Remember to monitor market conditions and rebalance your portfolio as changes occur. Because gold-related funds are so concentrated, it's important to ensure your asset allocation doesn't shift significantly from the percentage you originally established. A good rule of thumb is to rebalance at least once a year.
Portions of the mutual fund performance information contained in this article were supplied by Lipper, a Reuters company, subject to the following: Copyright 2013 © Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Lipper. Lipper shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.
This information is for educational purposes only and is not intended as investment advice, or meant to predict the performance of any American Century Investments' fund. Investment return and principal value will fluctuate, and it is possible to lose money by investing.