I’m back on my hobby horse, trying to show you the information I’d want if our roles were reversed.
I’m going to share with you a huge secret, something that most investors will never understand…something that I believe will double your portfolio’s total return going forward, while reducing the volatility of your investment returns.
This secret, my friends, is the only real ‘Holy Grail’ in investing. Nothing works all the time. Nothing is a free ride. And nothing is guaranteed to always make big returns. Getting better as an investor means improving your results over time and reducing the amount and duration of your portfolio’s pullbacks.
Today, I’m going to show you a foolproof way to do that and explain why now is exactly the right time to set your portfolio up in this way. This won’t cost you a dime — except maybe some minor trading costs. And yet…I know most of you won’t do it.
As you know, I generally think my efforts to educate investors are a waste of time. In my experience, you cannot teach anyone anything until they have a genuine desire to learn. There’s no such thing as teaching, there’s only learning.
That’s doubly true about today’s topic. You see, today’s topic is about gold…
I’m going to show you one of the real secrets that was unveiled at our meeting this week. This is an examination of why every investor should have gold in his or her portfolio — especially right now.
Generally speaking, there are two kinds of investors. There are, of course, investors who own gold. You probably know some of these folks. These investors typically believe the world is on the verge of a crisis. So they own gold and gold stocks…and almost nothing else. They generally have poor results. Their portfolios are incredibly volatile and, over time, they drastically underperform the stock market as a whole. These investors, however, carry these scars as a kind of badge of honour, proving their loyalty to sound money. No matter what I teach here, they will never change.
Then there’s the other kind of investor, the ones who trade stocks and bonds, buy mutual funds or exchange-traded funds (ETFs). These investors drive fancy cars, take exotic vacations, and send their kids to expensive colleges…financed by equity investments made 20–30 years earlier. These investors generally regard gold as the ‘loony’ sector of the market. They won’t have anything to do with gold, no matter what I write here.
These investors are, in my opinion, making a huge mistake. They don’t understand the proper use of gold and why owning it (at the right time, not all the time) would be the smartest financial decision of their lives.
I’ve written today’s essay to show you the way I believe investors ought to invest in gold. I’m going to give you a set of objective reasons why gold can reduce your portfolio’s volatility and increase your total portfolio returns by at least 40% annually. So…please…do me a favour. Just for once (nobody’s looking), open your mind and drop your defences. You don’t need to think of gold as an idol…or a useless relic. It’s simply an asset class with unusual properties. It’s the ultimate financial insurance.
Let me show you why you should always keep an eye on it…
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What’s the No. 1 idea I think investors must understand about gold and why they need some exposure to it? It’s not the risks of negative interest rates. It’s not the madness of government runaway deficit spending. It’s not even the likelihood of a complete collapse of the global banking system (which I believe is happening right now).
Sure, those are all important ideas. And I hope you will spend some time learning about gold’s long history as the ultimate financial safe heaven… But it’s not the No. 1 benefit that investors can gain from gold.
What’s more important than gold’s rule as the ultimate financial insurance? My colleague Steve Sjuggerud explained it in a recent essay for our free e-letter DailyWealth: Gold is the ultimate non-correlated asset. That means, when the other major asset classes are going down, gold tends to go up.
Think about it. When investors sell stocks, what do they buy? Most investors consider two choices when they think about their investments. They own either stocks or bonds — or both in some proportion that divvies up their investment ‘pie’ into the two pieces. Standard financial planning says you should own your age in bonds and keep the rest in stocks. So a 60-year old investor setting up his investments should aim to have 60% of his portfolio in fixed income and 40% in stocks. You won’t find gold anywhere in mainstream brokers’ allocation models. And that’s a huge mistake.
Historical studies show that using a basic asset-allocation model that simply includes gold alongside stocks and bonds can reduce ‘drawdowns’ by more than 50%. Drawdowns are times when your portfolio loses value. Portfolios that are 100% allocated to stocks sooner or later experience reductions in value of 50% or more. Those are big drawdowns that most investors find impossible to weather. They panic over the size of the losses and sell out, thus locking in the big losses.
Over 20 years, I’ve seen this happen every five or six years like clockwork. Even when I’ve told subscribers (correctly) that a downturn was about to happen again, most people tend to ignore these warnings, believing they are ‘buy and hold’ investors who can handle the storm.
But they can’t. I know that 90% or more of people who claim to be buy-and-hold investors are really ‘buy and fold’ investors. Sooner or later, things will get bad enough to make them sell. Adding bonds and gold into your portfolio allocation can ensure that this never, ever happens to you…while increasing your average returns.
How should you use gold? Let me show you one simple model.
To study the impact of adding gold to investor allocations, we simply back-tested a ‘dumb’ trend-following system. In this model, investors can allocate their portfolios into one of three ‘pie pieces’.
They can own stocks (the S&P 500 index) or bonds (the Merrill Lynch Corporate Bond Index) or gold (just plain bullion). Our model assumes investors will allocate to any of these three assets if they’re in an uptrend.
That’s why I call it a ‘dumb’ system — it’s mechanical. It involves no extra strategy, no attempt to select better-than-average stocks, and no consideration given to obviously inflated markets.
We’ve defined uptrends as periods when the asset’s 90-day moving average is above its 300-day moving average. When the shorter-duration moving average moves above the longer-duration moving average, then investors would ‘buy’ the asset class. When the shorter moving average fell below the longer moving average, investors would ‘sell’ the asset class. Their allocation could either be all stocks, or all gold, or all bonds…or any mix of the three.
We then measured the results of these assets individually from 1971 (when gold was officially de-linked from the dollar) through 2015. Out of the three assets, it’s no surprise that stocks did the best, returning 9.9% annually. But these results were very volatile, with drawdowns of 50%. Gold, by itself, did the worst — and also had the worst drawdowns. By themselves, neither gold nor stocks produced what I believe are satisfactory results. Both produced results that are simply too volatile for most investors to stomach and gold produced low returns to boot.
Bonds produced the best mix of low volatility and high returns, producing almost as much in gains as stocks, but with far less volatility. (I’ve often said that most investors should never buy stocks, as they’re likely to do better in bonds given their actual risk tolerance, as opposed to their perceived risk tolerance.)
So…is there a better way? Can investors earn more than they would in stocks and have less volatility than they would in bonds? The answer is yes. And the key is gold. Simply adding gold to the typical stock/bond allocation model and using a basic, ‘dumb’ trend-following strategy produced results that dwarfed the standard approaches to investing. The stocks/bonds/gold portfolio produced 13.1% annual returns for the period — better than almost any mutual fund or hedge fund — while having little volatility. The maximum drawdown in our model was a little greater than 20% — a level of volatility almost any investor can withstand.
Here’s what I want to point out about this basic model: it doesn’t include any of the advantages of investing in gold stocks, in addition to gold bullion. During a bull market in gold, certain gold stocks will move 10 times more than the price of gold…or 20 times more…or 50 times more. Sure, these stocks are insanely volatile. You wouldn’t want to allocate a lot of your portfolio to them. But they are a fantastic way to build wealth if you buy at the right times…and in the right ways.
Founder, Stansberry Research