Q: My $50,000 investment in gold is now worth $27,000. Over the last three years I haven’t had the stomach to invest in anything more. I’m 50 and my earning power is running out. Do I stick with the gold to prevent locking in a big loss or sell and try to make it up?
—Jordan, Canmore, Alta.
A: It’s hard for any of us to admit when we’ve made a mistake, and it’s even more difficult when a blunder costs us a big chunk of our retirement savings. But don’t compound your error by hanging on to an investment you never should have bought in the first place. Doing so is what gamblers call throwing good money after bad.
As it stands, you’ll need an 85% return to turn your $27,000 back to $50,000. That’s just over 13% compounded annually for five years, or about 6.4% annually for a decade. With that in mind, the more helpful way to frame your question is, “Do I believe gold is the best way to earn this return going forward without taking undue risk?”
You could also ask yourself, “If I received a $27,000 windfall today, would I invest it in gold?” If your answer to these questions is no—and I’m pretty sure it will be—then the logical action is to sell the gold now and use the proceeds to buy a different investment with better prospects.
This decision becomes even easier if this loss is in a taxable account, because selling now would generate a $23,000 capital loss that you can use to reduce a capital gain you’ve realized elsewhere—even carrying it back up to three years, or carrying it forward indefinitely to offset a future gain. That can significantly lower your tax bill and take some of the sting out of a poor investment decision.
—Dan Bortolotti, CFP, CIM, associate portfolio manager with PWL Capital in Toronto