Should I Invest in Gold?

Gold, all the Risk of Stocks with the Potential Return of Bonds. 

Because many of our new clients come from radio ads, they are constantly bombarded with messages from companies who sell gold investments. So, we’d like to address gold as a primary investment for a retirement portfolio.

Many people have considered Gold a store of value and a safe haven asset for many years, but is investing in gold with a majority of your money a wise decision? In this post, we will discuss why a gold-dominated portfolio is un-diversified, the long-term returns of gold compared to other investments, the current amount owned in a stock portfolio, and why, in our opinion, gold falls into the category of speculation rather than investment.

Firstly, a gold-dominated portfolio is un-diversified.

Diversification is a fundamental concept in investing that involves spreading your investments across different assets in an effort to reduce risk. The rationale behind this strategy is that if one investment performs poorly, the other investments in the portfolio may be able to offset the losses. 

However, if a significant portion of your investment is in gold, you may be exposing yourself to unnecessary risk. We like to think of growing money over time as about smooth returns, triples and doubles, not home runs. That’s because, mathematically, recovering from a major price decline is incredibly difficult as compared to a portfolio that never suffers a massive decline. You may never get out of the hole, so-to-speak. 

Here’s an example:

What return would you need to recover from a -50% decline? Most people would say that a 50% return would do it. But that’s not right. You would need a 100% return just to get back to even. What are the odds of that?

Secondly, gold offers lower long-term returns similar to bonds with the volatility (risk) similar to stocks.

Below you will find the return of gold vs the return of global stocks from Jan 1985 – July 2022. As you can see, stocks had nearly double the annual return of gold, yet gold had virtually the same risk (standard deviation). That’s a 36 ½ year period and it’s not even close.

*Annualized number is presented as an approximation by multiplying the monthly number by the square root of the number of periods in a year. Please note that the number computed from annual data may differ materially from this estimate.

Thirdly, equity investors are most likely already exposed to gold prices via the companies they own.

Businesses such as manufacturers and jewelry companies own huge quantities of gold used in their normal course of business. The question is: why would you want to own even more gold?

Lastly, we believe gold falls into the definition of speculation rather than investment, unlike stocks or real estate.

Gold is not like stocks or real estate, which can provide earnings in the form of rent and dividends. As such, investing in gold is more like speculating on its price than investing in an asset that more likely has the potential to generate earnings over the long term. We believe that one’s nest egg should be invested rather than speculated upon.

In conclusion, we think that investing in gold with a large portion of your money is a bad idea. A gold-dominated portfolio is un-diversified, and gold offers lower long-term returns similar to bonds with higher risk similar to stocks. Furthermore, stock investors are likely already invested in gold via the manufacturing and jewelry companies they may own. Gold also falls into the category of speculation rather than investment, in our opinion, as it produces no expected earnings or net income.

While gold may be a valuable asset to own as part of a diversified portfolio, we do not believe it should be the main focus of your investment strategy. Instead, investors should consider investing in a broadly diversified mix of assets (stocks, bonds, real estate, cash) that aims to provide them with the returns they need to meet their long-term financial goals.

man signing documents

The Secret Sauce of Financial Advice

Many people view personal financial planning as simply a means to an end: the end being a comfortable retirement or a large investment portfolio. 

While there is some truth in the above statement, the true benefit of financial planning is not the investment advice or number crunching, but rather the process of goal setting.

Behind every great sports team and behind every great player was a great coach. 

Why? Why do the very best athletes in the world use coaches? Mike Tyson, Tiger Woods, Roger Federer, and Tom Brady all use multiple coaches, despite the fact that they are the best at what they do. 

Answer: because they are better with them.

Financial Planners work with their clients to set clear, measurable financial goals and create plans to achieve them. This is the key to successful financial outcomes. 

A professional financial advisor can play a crucial role in this process by helping you set realistic goals, track your progress, and hold you accountable to your plan. “I have seen the enemy, and it is I.” said Pogo.

We all need help identifying what is important to us and staying focused on it over time. 

By defining our financial goals, we are able to focus on the end result and work backward to create a plan that will get us there. For example, if our goal is to save enough money for a down payment on a house, we know how much we need to save and can work out a budget to make it happen. 

On the other hand, if we simply focus on saving money without a specific goal in mind, it can be difficult to stay motivated and on track.

Writing down goals also helps to make them real and concrete. It’s one thing to say “I want to save money”, but it’s another thing entirely to write down “I want to save $200,000 for a down payment on a house by the end of the year”. 

By putting our goals in writing, we are far more likely to take them seriously and commit to achieving them.

Working with a professional financial advisor ensures that you have an unbiased perspective and helps you navigate the often-complex world of personal finance. 

They can also give you valuable advice on how to reach your goals and help you adjust your plan as your life circumstances change.

How to Execute on Values Driven Investing

Assuming that you have decided to make values-driven investing part of your investment process, how do you actually do it? There are four main methods that we’ll discuss here. 1. Do it yourself. 2. Use funds. 3. Use a separately managed account. 4. Use a combination of all three.

You can certainly purchase, or not, their individual stocks and bonds. Your decisions will increase or decrease the price, therefore raising or lowering the cost of capital for the business/government. (This will lower investor returns) This method gives you the most control because you can choose, or not, each individual company. Unfortunately, it does come with the added burden of researching and choosing the investments as well as monitoring all the securities over time. This can be a burdensome task.

Additionally, unless you are VERY wealthy, you will not have enough money to significantly impact their behavior by influencing the stock price. You just don’t have enough capital to push the price up or down enough. 

Another alternative is to use a values-focused fund such as an ETF or mutual fund. While you won’t have as much control, you and all your like-minded investment partners will speak with a much louder voice. Why? Because you are pooling your money now, you can move the price. You can also use the media to shame and otherwise influence the investees into acting right. The fund will also monitor the investment potential as well as the ethical behavior of your portfolio. This method gives you the least control, but the most impact.

A third choice is to use a separately managed account where you can set the specific tone for the values decisions question (No on abortion but yes on energy security, family values, 2nd Amendment, and border security, for example) and have the ability to specifically exclude certain companies/countries from your portfolio. This option may give you the best of both worlds because you can participate in the larger values-based initiatives (Larger voice, PR, etc.) of the firm you are working with, yet have much of the control you would have choosing or boosting specific companies or governments.  It’s the middle path. 

Finally, you can blend the three in a way that lets you have the best chance for your desired outcome. If you have no time or expertise, forget doing it yourself. You may even want to delegate it all to a fund rather than a customized separate account.  If you have some time and expertise you may want a small account you invest yourself combined with some funds and/or a separate account. You can customize these three methods to your preferences, wealth, and abilities.

In summary,  the four approaches are, do it yourself, use a fund company, use a separately managed account with specific client input, or use all three. Using all three is going to make more sense for wealthier households. 

Don’t wait, get started matching your values to your investments today!

Will Conservative ESG Investing Lower My Expected Investment Returns?

Most conservative Americans would prefer to invest in companies whose ethical and political behavior is consistent with their own values. After all, most of their friends and organizations are aligned with their values. It’s only natural. 

So, every conservative should align their investment portfolio with their values right? Well, one hesitation we’ve seen revolves around this question: Will investing in my values mean I have less money in the future?

Let’s explore that question. Right off the bat, do we, or can we know future investment returns? No. So the short answer is no, we don’t know if socially conscious investing will lower or raise future returns. 

We can, however, calculate expected returns from an investment portfolio. Let’s take the stock portion of the portfolio first.  Assuming you have broady diversified exposure to the stock market, your expected return should be similar to the long term return of the market (Somewhere around 10%); regardless of whether you are being selective about the ethics of the firms you own.

There are two other important factors in evaluating expected return that may be impacted by using conservative environmental social and governance filters to build your strategy. The largest, most offensive woke companies in the marketplace are often associated with big tech and hollywood. You know who they are. Eliminating or reducing your investment in these massive segments of the market will make the companies you own both smaller and less growth oriented. That’s because the biggest, fastest growing companies tend to be in this sector.

As it turns out,  small and value companies, the opposite of big tech, have higher expected and measured returns over long periods. So, your stock portfolio may very well have HIGHER expected returns if you eliminate big tech.

The factors that affect expected returns the most in the bond portion of your strategy are diversified exposure to the bond market itself. Historically this has meant around 6%. The two other factors impacting expected returns in the bond portion of your portfolio are term and credit. 

Term means the length of time the bond is making your capital available to the debtor. Generally, long term means higher expected return. This decision should not be affected by an investor’s value screen.

The creditworthiness of the debtor may be impacted by the decision to reduce or eliminate investment in big tech/large growth companies. The best credit is more likely to be associated with the big growth companies. Therefore, the corporate bond portfolio may have a higher expected return related to higher credit risk.

On the government bond side, the same may be true. First world governments tend to be the most woke, and therefore the lowest credit risks. Since ethically aware conservative investors would tend to avoid investing in these governments’ debt, expected return should be higher in this asset class.

So, assuming a conservative investor will generally avoid investing in big tech and woke governments, there may be a higher expected return in a socially aware investment strategy due to the size and valuation preferred stocks and the lower credit worthiness on the bond side. But, like we mentioned at the start, we don’t know future returns. In short, returns should be similar in a diversified portfolio whether it has ethical considerations or not.

What we do know is the ethical behavior of companies today. Every day we see stories in the news about companies taking woke positions on issues that are highly offensive to traditional Americans. We also have a pretty good notion that refusing to invest in them will help shape behavior of companies with regard to social, political, and religious issues like abortion, energy security, religeous freedom, immigration, national sovereignty, family values, and racial politics. 

This action will make the cost of raising capital higher for these firms; thus lowering the rate of return for the existing owners. Additionally, the more investors refuse to tolerate anti-American behavior, the more negative publicity accrues to these businesses. That’s bad for business and many firms will want to avoid negative attention.

So, don’t let concerns about sacrificing returns stop you from exercising stewardship over your investment capital. Invest in your values today.

Why Investing is like Panning for Gold

One way to find gold is to pan for it. You take the silt and sand from the bottom of a river, usually up in the mountains where gold seems are exposed, and you scoop it up in a pan. Then you swirl the material around until the heaviest particles (usually gold) separate from the other materials. You can then extract the gold from the pan in its purified form.

You could just load up all the sand and silt and take it off to the mill to be processed. But that would be very expensive and wouldn’t produce what you were really after, pure gold, very easily.

Building an investment portfolio requires a similar process. Somehow, we must refine or filter the approximately 43,000 globally publicly listed securities down to an investment strategy that best meets our financial goals (If you included non-traded investments the number of choices is astronomical so let’s decide to stick with listed securities because they are liquid and subject to constant market scrutiny). Each investor is unique.

Each investment situation is unique. So we must have a framework of decisions to winnow down the global investment market to suit us.

Just like hauling off all of the river sand, we could buy all global stocks fairly easily and cheaply using a global index fund or three. That’s actually not a bad portfolio.

You’d have maximum diversification, which is generally a good thing, and fairly low costs. Just like our gold speculator, however, you as an individual might have some needs and preferences that would benefit from eliminating some of these global investments in exchange for different portfolio characteristics. You’d be trading less diversification for some benefits.

Let’s talk about some of those trade-offs.

The first and probably most important one would be your ratio of stocks to bonds. The global portfolio is bond heavy. You’d be about 60% bonds which might not be the best idea if you were say, a 25-year-old investing for retirement. If that were you, you’d probably prefer little if any bonds in your portfolio because you would not need the safety bonds provided. Retirement is far off in the future and youth is the time to take smart risk.

So, eliminating stocks or bonds from the “buy everything” approach is first. Delete bonds for more risk, delete stocks for less risk.

What if you wanted higher expected returns for your stocks? Well, there are some things we know about stocks that can help us increase expected returns in your portfolio.

Risk is always related to return. So, how can we favor companies that are riskier individually but, via diversification, aren’t too risky for us as investors?

Small companies have higher expected returns than big ones. Why? Risk. Small companies fail more often so investors require more returns to invest in them.

Value (or struggling) companies have higher expected returns than growth (or great) companies. Huh? You are saying that struggling companies like Kmart have higher expected returns than Amazon? Yes, because risk is related to return and Kmart is riskier (They are flirting with bankruptcy).

One more screen we might use for stocks is profitability. It turns out that the most profitable firms today tend to generate the highest expected returns in the future.

Here’s an example of how this might help you. If you invested in the stock market in 1973 your dollar grew to $80 by 2011. Using just two of these screens, value, and profitability, your dollar grew to $572 over the same period. So, in this case, less diversification is a very powerful tool.

Now, for the bond side of your investment portfolio. Bonds are not a great source of risk-adjusted returns. As bond maturities go up, so does return, but not nearly as much as risk. Bonds become very price volatile as they respond to changes in interest rates. Let’s invest in short-term bonds only (5 years or less) and let’s buy longer-term bonds only when the interest rate they offer is significantly higher (A steep yield curve).

Bonds also pay investors for taking the underlying risk of the company. Really risky bonds (junk bonds) don’t offer a return commensurate with their risk. So let’s buy investment quality bonds only. And, let’s only buy lower quality bonds when we are offered significantly more return (This is called high credit spreads).

So, generally, we see bonds as a source of safety, not as a great source of real returns. Let’s buy only short-term, high-quality bonds to stabilize the portfolio in good times and get our long-term returns from stocks.

Now I have a stock portfolio that’s smaller, cheaper, and more profitable than the market. I have a bond portfolio that’s shorter term, and higher quality than the market. I also have a mix of stocks to bonds that is right for my life stage.

What about values?

Is it important that my investments match my values? Should I avoid or reduce my investments in companies whose ethical behavior is not aligned with my own? Are the companies I’m investing in aligned with me on the environment, social justice, politics, religion, healthcare, animal welfare, gambling, smoking, abortion, pornography, drugs and alcohol, and family?

If not, you may wish to eliminate, or reduce investment, in companies that don’t line up with your values.

So, now I have a smaller, cheaper, more profitable stock portfolio to give me higher expected returns. I have a shorter-term, higher-quality bond portfolio to stabilize my account during the tough market conditions. And, I’m investing in companies whose values align with my own.

By using a filtering princess akin to gold panning, you’ve improved your expected investment experience considerably by giving up some diversification in exchange for portfolio characteristics more aligned with your needs and preferences.