Want to Increase Your Profits and Lower Your Risk at the Same Time? Think Precious Metals
by Jason Dean
Historically, gold has been a store of value and the ultimate hedge against economic calamity. As the old Wall Street adage goes, “Put 10% of your assets in gold and hope it doesn’t work.” A recent study by Ibbotson Associates indicates that even in the absence of economic catastrophe, allocating a chunk of your portfolio into gold, silver, and platinum has worked, while simultaneously reducing your exposure to risk.
Everyone knows that diversification is an important element of investing. Most people consider “diversification” to be a good mix of stocks across multiple sectors, or perhaps a mix of stocks and bonds. But the truth of the matter is, in the thirty-plus years since the U.S. went off the gold standard, stocks and bonds have traded relatively in tandem, whereas gold, silver, and platinum have been counter-cyclical to stocks.
The Sharpe Ratio is a measure of an investment strategy’s risk-adjusted returns. In other words, it takes two things into account: 1) The profits or losses generated, and 2) The risk assumed by the strategy. The greater the return and the lower the risk, the higher the Sharpe Ratio. A recent study by Ibbotson Associates found that a “moderate” (as opposed to “conservative” or “aggressive”) portfolio without gold, silver, and platinum, had an expected return of 8.6% per year, with a Sharpe Ratio of 0.437. But by allocating 12.5% of assets into gold, silver, and platinum, the expected return was boosted to 9% and the Sharpe Ratio increased to 0.472. This data is based on historical performances, 1972 through 2004.
Recommended Asset Weightings
For a moderate portfolio, Ibbotson advises investors to make the following allocations:
- 20.4% U.S. large-cap stocks
- 12.7% U.S. small-cap stocks
- 19.7% international stocks
- 12.5% Spot Precious Metals Index (SPMI) — equal parts gold, silver, and platinum bullion
- 8.2% long-term U.S. government bonds
- 21.1% intermediate-term U.S. government bonds
- 5.5% 90-day U.S. Treasury bills