Given the exact same circumstances ... inflation, interest rates etc. in 50 years time to now and both stocks and gold might reasonably be expected to be the same in inflation adjusted terms. Gold however pays no dividends, so in total return terms stocks might be expected to have yielded the higher reward. Countering that however is that adding gold to stocks (or stocks to gold) is inclined to lower the volatility - and lower volatility yields higher CAGR.Your last paragraph…+1.
An asset can deliver a return via a combination of:
--Internal returns
--Speculative returns / price appreciation
With gold, all of the return is from price appreciation as it has no internal returns.
I, personally, wouldn't want to have 25% of my portfolio dedicated to an asset where all of the investment return comes only from price appreciation.
However, in the context portfolio construction, small amounts of gold have in the past been useful because of gold's erratic low correlation with stocks, and has, in certain time periods, increased risk-adjusted returns of a stock/bond portfolio.
That’s when it’s needed the most, IMHO. In the context of the portfolio, you’re only really diversified if parts of the portfolio are doing great when other parts are floundering. Then you get the added bonus of rebalancing (required) as needed. It also makes it easier to stick with through thick and thin. Avoid catastrophic losses. Win by not getting slaughtered.
So what’s the right allocation percentage? If no one knows future returns of anything, plan and act accordingly.
Rebalancing or not broadly makes no difference. With non rebalanced the tendency is to end up with a high weighting in whatever asset performed the best. For some start dates and periods that will be gold, you might for instance start with 50/50 and end 10 years later with 80/20 weightings. De-risks start date/earlier years risk.
For example starting 2000 50/50 initial stock/gold non rebalanced ended 10 years later with 80/20 gold/stock https://www.portfoliovisualizer.com/bac ... 9AQvdGXg5E (select the left edge Allocation Drift option) where the stocks CAGR = -1% and gold CAGR = 14%. In other 10 year period cases that swings the other way around. Similar to had you yearly average weighted (80+50)/2 = 65% in the better performing asset. Much of 30 year SWR outcome is a reflection of how well/poorly the portfolio performed in the first decade/earlier years.
Fundamentally gold might be considered as similar to bonds, T-Bill like (price accumulation benefits rather than interest/dividends), but with very long dated treasury type price volatility - however where that volatility tends to be counter cycle to stocks. Might replace the bond holdings/allocation of a stock/bond portfolio. On that basis compare a Monte Carlo simulation for 67/33 stock/bonds to 67/33 stock/gold 30 year 4% SWR
67/33 stock/bonds
https://www.portfoliovisualizer.com/mon ... 5qHUNSn8Ws
67/33 stock/gold
https://www.portfoliovisualizer.com/mon ... rYvJwAIy8q
and the latter provided the better risk adjusted reward (better 10th percentile bad case outcome, higher success rate 96% versus 95%), higher median (50th percentile) case outcome.
A asset that is held in-hand, has no counter-party risk, with price appreciation only payout, no regular tax-stream such as bond interest, that might yield similar/better portfolio outcome than if bonds were being held. For those with pension income - that might be considered as being bond based, gold as a distinctly different asset diversifies that rather than a investor holding additional bonds on top of what their pension may already hold. Another feature is that for those that hold bonds they may also hold some cash for cash-flow purposes. With stocks and gold there is less need for cash, just spend using credit cards and each month settle those by selling some of stocks or gold, whichever is the more above target weighting at the time - that is a partial rebalance motion in itself, and where often one or the other will be up (or less down) at that time.
As for how much, well 67/33 stock/bonds is a common choice, so 67/33 stock/gold as a alternative is reasonable. Whatever circumstances that might drive 67 stock value to halve to 33 might equally drive 33 gold value to double to 67. No capital loss, just a 67/33 -> 33/67 transition that rebalancing back to 67/33 has you positioned as before, no capital loss, same allocation, but where you're holding twice as many stock shares as before after stock prices had halved. Yes a contrived example, stocks rarely halve, in practice that effect is much less extreme but typically evident.
Statistics: Posted by seajay — Fri Nov 15, 2024 2:27 am