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.