o3 BLOG | Investing
Gold as a Portfolio Diversifier — Strategic and Asset Tactical Allocation
Gold as a Portfolio Diversifier — Nearly all seasoned investors will agree that gold is an essential asset in a well-balanced portfolio, complementing stocks, bonds, and other alternative investments. Gold acts as a multi-faceted hedge and significantly outperforms many different asset classes when other markets are falling yet sustains stability when markets are rising. Gold has consistently surpassed equities in total value appreciation over the last fifty years.
How Gold Can Enhance Your Portfolio
- Diversify your portfolio and mitigate losses, acting as a hedge in inflationary periods or market downturns.
- Offer liquidity without credit risk
- Generate long-term returns
- Improve portfolio performance overall
- Preserve wealth
Two Methodologies for Asset Allocation:
- Strategic Asset Allocation
- Tactical Asset Allocation
Overview of Strategic Asset Allocation
Diversified buy-and-hold passive investing is a simple way to create wealth for many people. Strategic Asset Allocation entails a passive, diversified portfolio to which you continually add money and rebalance accordingly. A diversified portfolio that uses strategic asset allocation contains a range of index funds or ETFs that rebalance it from time to time. If one asset class rises while another falls, you sell some of the higher-performing assets and buy the drop in the underperforming asset to keep the same proportion over time to maintain balance. A strategic asset allocation approach is similar to a buy-and-hold strategy, emphasizing diversification to mitigate risk and maximize profits.
Investing becomes routine with portfolios that use strategic asset allocation methods. However, over time investors may become more conservative and risk-averse. Seasoned investors often advise novice ones to begin with a high stock allocation and progressively reduce their stock allocation while increasing their bond allocation over time.
Overview of Tactical Asset Allocation
Tactical Asset Allocation is a step up from traditional asset allocation, and it involves actively modifying your weightings in different asset classes depending on momentum or predicted forward returns. Unlike strategic asset allocation, tactical asset allocation takes a more hands-on approach to asset allocation — right now, investors who use tactical asset allocation practices are setting their sights on gold. Given the current political and economic climate, more investors are modifying asset allocations to increase gold and gold mining stocks because of attractive risk/reward ratios existing in the market. The benefit is that investors decrease risk while increasing rewards in the short term, allowing them to turn profits more quickly. It is a somewhat active strategy as managers return the portfolio to its initial asset allocation after achieving their short-term profit goals executed over the long term. Tactical asset allocation is essential for building and balancing an investment portfolio and optimizing portfolio performance.
In short, you can consider tactical asset allocation to be similar to captaining a ship. Suppose a storm suddenly popped up on your radar 300km from your current location — you might have to make some quick decisions that you wouldn’t ordinarily make to prepare for them to ensure you reach your destination safely. In other words, while you might not allocate more than 10% of your portfolio to gold, knowing about political tensions or threats of inflation on the horizon might make you consider otherwise.
The Rising Popularity of Gold
To achieve diversification and risk-adjusted returns, investors have welcomed alternatives to traditional stock and bond investing. This move has had an impact on gold allocations. Gold is becoming more widely recognized as a mainstream investment, as worldwide investment demand has surged by an average of 14% per year since 2001, while the gold price has nearly doubled.
The following are the main drivers of this expansion:
- Economic rise in emerging markets, particularly in China and India, broadened and diversified gold’s consumer and investor base.
- Market access: The introduction of gold-backed ETFs in 2003 significantly increased interest in gold as a strategic investment, lowering the total cost of ownership, improving efficiencies, and creating more accessible onramps to financial instruments.
- The global financial crisis of 2008 generated a renewed focus on effective risk management and a rise in the value of uncorrelated, highly liquid assets like gold. Trade tensions, the rise of populist movements, and concerns about the economy and political outlook have prompted investors to reconsider gold as a conventional hedge in times of uncertainty.
- Consistently lower interest rates diminish the opportunity cost of owning gold and highlight its qualities as a source of true, long-term rewards, especially when compared to historically high amounts of global negative-yielding debt.
- Demand from central banks: A boom in interest in gold from central banks around the world, which is often used in foreign reserves for safety and diversity, has prompted other investors to explore gold’s beneficial investment characteristics.
The Strategic Importance of Gold
Stocks, bonds, and broad-based portfolios all benefit from the addition of gold. Gold has historically increased portfolio risk-adjusted returns, delivered positive returns, and provided liquidity to pay liabilities in times of market stress as a store of wealth and a hedge against systemic risk, currency depreciation, and inflation.
A Source of Income
Gold has always been thought to be a good investment during times of uncertainty. It has historically produced long-term positive returns in both good and poor times. In the nearly half-century following the end of the gold standard in 1971, gold’s value has climbed by an average of 10% annually.
This dichotomy reflects gold’s numerous sources of demand and sets it apart from other investment assets. Because gold has global recognition and is not a liability, it is used to protect and enhance wealth over time and is also used as a medium for exchange. Gold is also in high demand as a luxury item, with customers worldwide appreciating its worth. It’s also a crucial component in electronics. These various sources of demand give gold a unique resiliency — the ability to deliver substantial returns in both good and bad times.
To learn more about using gold stocks in tactical or strategic asset allocation, contact our investor relations team today!
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