Can Gold Reduce Portfolio Volatility?

You’ve heard it before and will likely hear it again…Diversification is the key to long-term investing. We couldn’t agree more….And in our view, regardless of your personal feelings about gold, the yellow metal can reduce portfolio volatility over time; keeping investors focused on their long-term objectives.

Building wealth over time requires the ability of investments to stay a step (or two) ahead of inflation. While many such investments that might be capable of beating inflation for extended periods of time can exhibit short-term volatility, these instruments rarely exhibit stomach-churning volatility to the degree that investors look to dump them.

The fact is that very few investors can remain focused on the big picture during periods of extreme volatility. Watching the value of your portfolio decline by 20, 30 or even 50 percent can be extremely disheartening to say the least. This can cause investors to begin making decisions that are not in line with their long-term goals. This lack of consistency during difficult periods for the markets can cause investors to lose great sums of money-especially over the long run- as they exit from asset classes often at the absolute worst possible time. The fact is that retail investors often buy tops and sell bottoms…

During periods of heightened volatility or bear markets, the investment community will likely preach the potential benefits of portfolio diversification. After all, isn’t this what investment professionals are paid for?

While their advice may be made with the best of intentions, shouldn’t investment professionals offer solutions that may potentially reduce portfolio volatility? In our view, simply shifting capital from equity to fixed income simply does not cut it anymore.

Although fixed income allocations can significantly reduce overall portfolio volatility, they also reduce returns. Unfortunately, there is a very widespread belief that reduced risk must come with reduced returns and that to generate returns, one must take excessive risks. In our opinion, this is simply not the case.

We are of the opinion that gold can be an extremely useful asset when it comes to risk mitigation. While some foolishly believe that gold is simply some old relic, thing of the past or something to collect; we believe that history has shown the value of this precious metal for wealth preservation and portfolio diversification.

Consider this: If you were to include gold in a portfolio comprised of equities, fixed income or both; you will see just how much of an impact gold has. The proper mix of gold, equities and fixed income can potentially not only produce substantial returns, but can potentially produce returns that keep you ahead of the inflation curve.

What makes this especially interesting is the fact that gold is not relied on to generate returns. The purpose gold serves is to manage risks associated with other asset classes contained in the portfolio. For example, as the mortgage and banking crises hit in 2008, gold prices made all-time-highs of nearly $2000 per ounce. What did stocks do? They got crushed wiping out billions of investor value in the process. Bond and note prices rose as investors sought refuge and interest rates fell.

Now fast-forward to 2016. Stocks have been moving higher for years now with the broad market SP500 reaching new all-time-highs in 2015. What did gold do during this period? It declined. Interest rates were held at essentially zero during this entire period.

As 2016 got under way, the stock market began to crack, and it is still cracking. Markets are now flirting with bear market territory as worries over China and the threat of global deflation take hold. The Federal Reserve recently raised interest rates for the first time in nearly a decade, also giving investors something to think about.

As stocks are falling, gold is showing signs of life…. Surprise, surprise…

The reality is that regardless of your opinion of gold, it has been shown to serve a purpose and that it can be very useful for reducing portfolio volatility. With global economies and stock markets under significant pressure, gold may be getting ready to resume its long-term uptrend.

If stocks see another breakdown like 2008, do you think gold could rise back to all-time-highs? Perhaps even significantly exceeding those prior highs?

We certainly do…

The writing is on the wall…Stocks have begun falling apart and could see significant additional declines. If you are not well-diversified, now may be the time to consider an allocation in gold.

Making a capital allocation in gold has never been easier. Your IRA account may be the ideal vehicle for gaining some exposure to this critical precious metal. Advantage Gold account executives can walk you through the process of setting up a gold IRA or rolling over an old IRA or 401k. Don’t wait for equities to fall further, taking part of your net worth along with them. Call us today at 1-800-341-8584.

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