Gold and Gold Stocks play an important role in striking a balance in investment portfolio diversification.

The goal of portfolio diversification is to balance asset classes with different risk profiles so that we achieve a lower overall risk.  Historically, Gold Bullion has averaged 13% volatility and Gold Stocks have averaged 38% volatility.  At first glance, it might be easy to perceive Gold and Gold Stocks as “risky.”   However, in calculating overall portfolio risk, gold bullion and gold stocks can actually be used to enhance the total return for a portfolio while actually reducing the overall market risk in the portfolio.

Several decades have past since these initial studies were conducted, during which time numerous studies have found substantively similar results.

Today, the average investor can buy gold bullion or gold stocks to increase the diversification of their investment portfolios.  U.S. Money Reserve is one of the few authorized dealers of official government issued gold bullion.

Lower Portfolio Risk

That reduction in “portfolio risk” is due to the reverse correlation between gold (and gold stocks) versus the stock market.

How It Works

One study showed the stock market averaged a 0.89% monthly gain from 1971 through 1987; while gold stocks averaged a 1.42% monthly return during the same time period.  By adding a small allocation of gold stocks to a portfolio, we can achieve a similar return while lowering the overall risk; compared to a portfolio of 100% stocks.  Or vice-versa, we can achieve higher returns with the same amount of risk.

A statistical analysis showed that a portfolio of 85% stocks and 15% gold stocks had approximately the same volatility as a portfolio of 100% stocks, but achieved a higher total return.

Here are the actual results – a portfolio of 100% stocks in 1971 achieved an average annual return of 9.69% through 1987.  However, a portfolio of 85% stocks and 15% gold stocks achieved an average annual return of 10.50%.  In dollar terms, a $100 investment in 1971 would be worth $4,800 for a portfolio of 100% stocks, compared to $6,600 for a portfolio of 85% stocks and 15% gold stocks.  That’s a 37% increase in the total investment return while adding essentially zero risk.

Different studies covering different time periods have shown similar results.  Many financial advisers today suggest an allocation between 10% and 15% to achieve higher investment results with very little additional risk.

Many financial advisers also recommend direct investment in Gold Bullion.  Historically gold has also outperformed stocks, and is traditionally viewed as a hedge against inflation. Gold bullion has also traditionally had the same inverse correlation with the dollar as gold stocks have.  In other words, as the value of the dollar declines, the value of gold traditionally increases.   Thus gold bullion can also be added to a portfolio to achieve an increase in diversification, potential higher returns, and potential reduction in risk.

The average investor today can add gold bullion or gold stocks to increase the diversification of their investment portfolio.  Some of the safest gold bullion to invest in is official gold bullion issued by the United States government through a small number of authorized dealers.

 

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