Benefits And Risks Of Including Precious Metals In Your 401k
The 401k is one of the several retirement savings options for employees in the United States.
It is even the most popular as reported by the United States Census Bureau. This report explained how almost double the number of people with Individual Retirement Accounts had 401k accounts. The number is almost triple the amount of people that use cash balance plans.
This is either because employees have willingly chosen it as their retirement savings option or because it is one of the default packages that come with most job offers. You can click here if you would like to see the report by the United States Census Bureau.
Well, 401k accounts are not just supposed to be about savings from monthly contributions. It is also a scheme that allows for investment under certain guidelines. Account holders can choose between several investment options.
Some of the available options include investment in ETFs (Exchange-Traded Funds), company stock, individual bonds & stocks, balanced funds, index funds, and mutual funds. These are some of the direct ways to invest with your contributions.
Indirect Investment In Precious Metals For 401k Account Holders
Investment in precious metals for 401k account holders requires an indirect approach. For instance, one can invest in ETFs that are invested in precious metal companies. The problem with this is that investors have extremely limited control of their investments.
As a result, their fate lies in the performance of other players. This is why it is not seriously considered by some 401k account holders hoping to make the most of the precious metal market.
Rolling over 401k contributions to a self-directed IRA that allows for precious metal investment promises more control. There is also the option of conversion to a Precious Metal IRA which also offers more control.
Doing either of the aforementioned still requires strict adherence to guidelines set by the IRS (Internal Revenue Service). For example, certain investment moves can only be done using the services of an IRS-approved custodian, depository, and precious metal company.
Many people considering taking this route ask if it is worth it. Well, understanding the benefits and possible risks involved will help out. To this end, this article will discuss some of the benefits and possible risks. Make sure to continue reading to stay informed.
Benefits Of Including Precious Metals In Your 401k
People have been investing in precious metals for a long time. For instance, there were investment activities as far back as the seventh century BC. The fact that it has stood the test of time for this long is proof that it is tested and trusted.
This is a reason 401k account holders may want to make the most of the precious metals market. Some of the benefits of doing this include the following:
Investment Diversification
There are several precious metals, and they all have their peculiarities. For example, there are investment benefits that are more common with silver than with gold.
As a result of these peculiarities, investors are afforded several investment options. This is important for two reasons. Firstly, it means that people are not restricted to a limited amount of investment. Secondly, it means that investors can have their eggs in several baskets. This is to reap the benefits of several portfolios or ensure that damage to one does not take away all of one’s investment.
Investors need to understand the highs and lows before they invest. For example, you can do a platinum vs gold comparison to see which one best suits your investment needs and preferences.
Capital Appreciation Potential
History is fond of repeating itself. This is a lesson that investors need to take seriously. The possibility of things that happened before happening again should also lead people to make the right decisions.
Going by history, precious metals have capital appreciation potential. This has happened several times with gold, silver, platinum, palladium, and so many others. As a result, there is the potential for wealth growth for those who invest in precious metals. This can be a good reason to include it in your 401k.
By the way, some precious metals have more to offer in terms of capital appreciation than others. You need to do your research and invest in the right ones with due diligence. It is also a good idea to diversify your investment portfolio across several options.
Portfolio Insurance
The stock market can crash. History has proven this several times. For detailed examples of some stock market crashes, you can visit: https://www.chicagotribune.com/.
As a result, investing in stocks alone is not advised. You may want to consider or include options that have more insurance to preserve your liquidity and capital. Bonds are a good idea.
In the same vein, precious metals offer a great deal of insurance. So, investors have very little or nothing to be worried about in the face of general market downturns, financial crises, and geopolitical troubles. The same cannot be said about stocks, which is where a lot of 401k account holders invest their contributions.
Liquidity
Liquidity explains how easy or difficult it is to sell or buy assets in a market. In this context, it means how easy or difficult it is to sell or buy precious metals of all kinds.
Well, the truth is that there are options that are quite easy to sell and buy. Silver and gold are remarkably high on the list. Platinum and palladium are also options.
It is essential that you think about how liquid your option is before you invest in it. This is especially so that you do not encounter problems selling it when the need arises.
Hedge Against Inflation
Inflation causes paper currencies to experience a value decline. This explains why the prices of commodities rise. Thankfully, precious metals like gold and silver have been known to provide a hedge against inflation.
This is because their value also increases as inflation sets in. Gold in particular has been known to help in this regard. You can read this article for more information about this.
Possible Risks Involved In Including Precious Metals In Your 401K.
There is the rosy side of investing in precious metals as seen above. However, there are possible risks involved and investors need to be fully aware of them. Some of the possible risks include:
Volatility
There can be swift and massive fluctuations in the value of precious metals. This could lead to short-term gains, as well as losses. Your 401k portfolio’s performance will be impacted by the market’s volatility. However, it is worth noting that some metals are more volatile than others.
Long Rather Than Short-Term Growth Potential
More often than not, the growth potential is in the long term. So, it is not the sort of investment that you should expect to provide significant value growth in the short term. Investment assets such as real estate and stocks are better in terms of offering short-term growth proceeds.
Limited Cash Flow
Given the fact that growth potential is for the long term, there could be very little or no cash flow in the short term. This is one of the reasons 401k account holders are not advised to invest all of their contributions in this investment option.
The Market Can Be Manipulated.
The precious metal market can be manipulated especially by dominant players in the market. For example, these players can practice what is known as wash trading, which is the organized selling and buying of assets. This is with the intention of creating a fake impression of massive trading activities.
The goal is to retain advantages in the market using improper tactics. Additionally, the market can equally be manipulated using tactics such as front running, price manipulation, spoofing, insider trading, and pump & dump.
Storage & Security
The IRS does not allow precious metals IRA account holders to personally store their purchased precious metals. This has to be done by an IRS-approved depository. Even the purchase of these assets has to be done using the services of an approved custodian.
You will be charged for the storage and securing of your asset. The cost depends on the depository, but the point remains that you will be charged for this service.
By the way, this is why working with the right precious metal company is important. They serve as a link between you and the required service providers. This includes the IRS-approved depository. It is therefore crucial that you engage the services of the right one.
You can check credible reviews to aid you in making the right choice. For instance, you can see Goldmoney reviews for information about this company.
Custodial Fees
The custodian plays a crucial role in helping you set up and manage this kind of investment. This comes at a cost given you will have to pay custodian fees.
The entire cost has to be considered before you start working with a custodian. However, you should not settle for a below-par custodial service in your bid to get cheaper fees.
Conclusion
The benefits and possible risks of investing in precious metals as a 401k account holder have been discussed here. It is safe to say that investing in the right precious metals offers a lot of benefits. So, it is a good idea for 401k account holders to do this.
However, it is wiser not to have all of your contributions invested into precious metals. Investment diversification is advised in light of the possible risks involved. So, it is better to roll over only a portion of your contributions into a precious metal IRA for this purpose.
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