Gold in Your Investment Portfolio: An Asset Protection Strategy from ART BURG

Gold as Insurance: A Look at the Investment Portfolio

Many novice and experienced investors ponder the advisability of buying gold to diversify their investments. Analysis shows that this precious metal can indeed act as a guarantor, reducing risks and contributing to profit growth, especially when stocks and bonds are declining.

With the judicious inclusion of gold in an investment portfolio, one can significantly shorten timeframes and mitigate overall risks. Furthermore, in conditions of weakening stock market performance, investments in gold can increase the overall return of the portfolio.

Advantages and Pitfalls of the Precious Metal

The main advantage of gold lies in its ability to effectively perform an insurance function at relatively low costs. This aspect makes it attractive to those seeking reliable ways to protect their assets.

However, investors who hold gold as insurance for more than two decades may encounter one 'drawback' – a decrease in total returns in the long run. This can be avoided by carefully analyzing stock markets to buy gold immediately before an expected rise in its price or a fall in the value of other assets. Nevertheless, predicting the benefits of such investments remains a complex task even in the short term.

Diversification: Key to Preserving Savings

The only effective way to bring clarity to matters of purchasing power and savings is to distribute financial assets among various types of assets. This phenomenon is known as diversification and aims to mitigate investment risks.

Through diversification, an investor increases the chances of preserving their savings in at least one asset type, even if others depreciate. Otherwise, there is a high risk of losing all capital.

Five Pillars of Gold's Risk Diversification Ability

The precious metal's ability to effectively diversify risks is based on several key characteristics:

1. **Lack of Correlation:** Gold prices show low or zero correlation with other asset classes, making it independent of stock or bond market movements.
2. **Positive Asymmetry:** The value of gold tends to rise faster than it falls, allowing investors to more quickly recover losses incurred from other assets.
3. **Deep Liquidity:** Physical gold boasts high liquidity, meaning it can be easily and quickly bought or sold on the market.
4. **Global Demand:** Gold attracts attention not only from investors but also from jewelers, central banks, electronics manufacturers, and representatives of many other industries, ensuring a broad and stable market.
5. **Absence of Currency Risks:** The value of gold is not directly dependent on the dollar exchange rate, although its price is traditionally quoted in this currency.

Balance and Returns: Annual Portfolio Review

It is recommended to check the balance of assets in an investment portfolio annually. Interestingly, the higher the proportion of gold in a portfolio, the higher the potential risks. However, at the same time, potential profits also increase during periods when other assets begin to fall in price.

Predicting the long-term effectiveness of buying gold is virtually impossible. Nevertheless, its presence in a portfolio consistently contributes to reducing overall risks, despite a possible simultaneous decrease in overall returns over long periods.

Over the past forty years, a portfolio including about 10% gold showed a compound annual growth rate of 9.9%. This is 0.2 percentage points less than the annual performance of a gold-free portfolio with a standard 60:40 stock-to-bond ratio.

Many financial advisors sometimes discourage their clients from investing in gold, calling it an 'unproductive asset.' This is because profit from selling the precious metal can only be realized when its price increases. In contrast, securities can generate income more stably and regularly.

Each investor must make their own final decision regarding the inclusion of gold in their investment portfolio. This article is for informational purposes only and is not an inducement to any action.