In our modern age, the concept of insurance permeates nearly every corner of society. We buy life insurance, homeowner’s insurance, and car insurance. Anything with value, we insure. Insurance offers protection from possible future outcomes, to protect your loved ones in case of your death, or to protect your home from natural disasters, crime, and accidents. But who is protecting your investments? It’s equally important to insure your investments against an unstable market or unfortunate events.
To insure against a fluctuating stock market, buy gold and silver as guaranteed investment insurance. Purchasing silver and gold not only helps to stabilize the market and lessen your investment risk, but historical data proves that gold is the most effective way to secure your investment and stabilize your returns. When real estate, stocks, and bonds drop suddenly, keeping your portfolio from suffering can be challenging. Include gold in your assets though, and your investment risk drops drastically.
In times when the stock market was unreliable, gold assets upped the portfolio returns. In times when the stock market was stronger, gold assets may cost you– and with good reason. For the past few decades, people were required to pay insurance premiums to retain gold assets in their portfolios. These higher premiums often translated to smaller returns over a longer period.
One way to avoid the costs incurred by a long-term portfolio is to purchase gold when the price is low and before any other investments have declined. While some investors swear by this “hack,” there are several issues with relying solely on outside factors. The biggest problem with this strategy is the simple fact that it’s all about timing.
No one can predict how a certain investment will do at any given time, and it’s even more difficult to make two investments line up. Even more, no one has the intention of withdrawing their investment dollars early because of an emergency– but life happens. There is inherent risk involved with investing, and there is a chance you may find yourself needing to pull back your investments after your stocks or bonds have declined.
Diversification as the Answer
To solve the problem of investment risk, diversify your assets. Instead of throwing everything into a single holding, choose two or more investments. Diversification allows you to balance your investment risk by spreading your assets out. By maintaining a variety of assets, you can reduce unknown factors and take control of your portfolio. And avoiding diversification could be costly: if your single investment crashes, your savings will collapse with it.
Financial advisors lean toward two simple asset classes when recommending portfolios: 60%-70% stocks and 30%- 40% bonds. This arrangement allows for some leeway as your investments fluctuate. A good suggestion is to reassess your portfolio every year or so. In this process, your financial advisor may tell you to sell your high-performing investments as you simultaneously buy more of the low-performing assets at a lower cost. Even with this rebalancing, your stocks to bond ratio should remain between the established percentages. If you don’t rebalance your portfolio approximately once a year, your portfolio diversification and insurance will suffer.
Some advisors may try to keep you from diversifying your portfolio with gold. They would have you purchase more stocks and bonds that pay dividends since gold alone doesn’t produce income. For gold to increase investment power, gold prices have to be driven up. Not only do gold and equities like stocks and bonds differ in how they increase your portfolio, but they differ in the reasons they fluctuate.
The Power of Gold Diversification
There are five reasons why gold is such a powerful investment asset. These reasons can help us understand why gold diversification is a great way to reduce risk and strengthen returns.
Global Demand
In addition to gold being accepted as a universal currency, there always will be a demand for gold. When consumer demand for gold goes up, so does the value.
Widely Accepted Gold bullion is one of the most valuable and widely traded assets in the world. Gold is not categorized as a currency, but if it were, gold would be the 4th biggest foreign exchange, traded 24 hours a day across the globe, Monday through Friday. Lack of Correlation
Since Gold prices aren’t affected by many competing classes of assets, gold holds the unique ability to even out the sharp declines of an overall portfolio.
Positive Bias
Unlike stocks, gold prices tend to go up more than they go down. And since gold has little to no relation to your other investments, gold helps lower the effects of declining investments in other asset classes.
No Counterparty Risk
Since gold has direct value against all currencies, gold protects portfolios from both economic inflation and drastic currency fluctuations.
The History of U.S. Gold Diversification
It’s important to study the effects of adding gold to a U.S. investment portfolio. With the data below, we can see aggregate returns including investment performance and yield, not including any taxes, fees, or additional costs. At the end of every fiscal year, a portfolio rebalancing will be performed to stay relevant in the latest gold, stocks, and bonds. Such equities as the S&P500 Index, as well as 10 year Treasury bonds, are designed to keep the 60% to 40% ratio until gold is included in the portfolio. The result of including gold in a U.S. portfolio is that equities and bonds declined in proportion.
As far as the future, gold has bolstered the value of the American portfolio. During the Tech Stocks Crash, the average U.S.-based portfolio return saw an increase of 0.7 points every year, taking annual returns from 2.6% to 3.2%. Even considering the worst of 2008, a 10% gold investment insurance holding reduced losses by 1.8 percentage points.
From the years 1975 to 2015, a 10% gold investment portfolio would have guaranteed a nearly 10% compounded annual rate of return. This return caused portfolios that didn’t follow the 60% stocks and 40% bonds model to drop 0.2 points every year. When American stocks and bonds were peaking in 1995, the 10% gold portfolio would have simply brought returns from 32.2% to 29.1% overall. In conclusion, the cost of gold insurance is worth the stability and security that it guarantees– in the good years and the bad years.
