Gold instead of Bonds

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redfan11
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Gold instead of Bonds

Post by redfan11 »

I know BHs are not into commodity, but would anyone of you recommend holding a small percentage of gold (as ETF/gold certificate or gold bars) in your portfolio? Just curious to know if this would help maintain diversify my portfolio and mitigate risk.
thelateinvestor43
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Re: Gold instead of Bonds

Post by thelateinvestor43 »

Watch out! I asked something similar a few days ago! :shock:

I've decided though that GOLD is too volatile.
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firebirdparts
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Re: Gold instead of Bonds

Post by firebirdparts »

"recommend" is a pretty strong word. You need to come to your own conclusion. white coat investor has a blog posts called something like "150 portfolios better than yours". Just read it.

There is a thread on here about "golden butterfly." it's long. There's a thread about a modified "golden butterfly". The golden butterfly portfolio was invented by a member of this forum. There are several other "named" famous portfolios that have gold.

I will give you my opinion. In backtesting, gold pops at just the right time to make it look good as a major diversifier over the last 50 years. Will it pop at the right time again? I don't know.
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annu
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Re: Gold instead of Bonds

Post by annu »

I invest once a year every Feb 14th....I think it's like 2% of my total portfolio :sharebeer
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whodidntante
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Re: Gold instead of Bonds

Post by whodidntante »

You can buy a gold bar for about $650,000. That does not include insurance, but it does include petting privileges.
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fredflinstone
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Re: Gold instead of Bonds

Post by fredflinstone »

redfan11 wrote: Fri Feb 28, 2020 11:14 pm I know BHs are not into commodity, but would anyone of you recommend holding a small percentage of gold (as ETF/gold certificate or gold bars) in your portfolio? Just curious to know if this would help maintain diversify my portfolio and mitigate risk.
A portfolio with three asset categories (stocks, bonds, gold) is more diversified than one with two asset categories.

During the last 15 years, gold and equities have had about equal returns (stocks up 242 percent, gold up 241 percent). I think everyone should allocate at least 10 percent of his or her portfolio to gold. Jack Bogle himself was not anti-gold.
Stocks 28 / Gold 23 / Long-term US treasuries 19 / Cash (mainly CDs) 22 / TIPS 8
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watchnerd
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Re: Gold instead of Bonds

Post by watchnerd »

redfan11 wrote: Fri Feb 28, 2020 11:14 pm I know BHs are not into commodity, but would anyone of you recommend holding a small percentage of gold (as ETF/gold certificate or gold bars) in your portfolio? Just curious to know if this would help maintain diversify my portfolio and mitigate risk.
For stock panic protection: Long Treasuries > Gold

For inflation protection: TIPS > Gold

For zero correlation to everything: Cash > Gold

Gold is then left for "other" situations as its super power.

That being said, it is a good diversifier and advances the Efficient Frontier of high equity portfolios in modest amounts. Even Morningstar admits this.
60% Global Market Stocks (VT,FM) | 38% Global Market Bonds | 2% crypto & securitized gold || LMP TIPS/STRIPS || RSU + ESPP
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watchnerd
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Re: Gold instead of Bonds

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thelateinvestor43 wrote: Fri Feb 28, 2020 11:19 pm Watch out! I asked something similar a few days ago! :shock:

I've decided though that GOLD is too volatile.
Yeah....

GLDM (gold minishares ETF) in my experimental Golden Dragonfly port (10% gold) was down Friday a whopping -3.55%.
60% Global Market Stocks (VT,FM) | 38% Global Market Bonds | 2% crypto & securitized gold || LMP TIPS/STRIPS || RSU + ESPP
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Sandtrap
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Re: Gold instead of Bonds

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whodidntante wrote: Fri Feb 28, 2020 11:35 pm You can buy a gold bar for about $650,000. That does not include insurance, but it does include petting privileges.
+1

For that amount of money, one can buy a 4 plex or larger R/E rental income unit in cash, and if bought wisely, build up an income stream as well as tax advantages.

But, you can't pet a building like you can a gold bar.
And, you can't sleep next to it and watch it give off golden rays of moonlight.

j :happy
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inferno9898
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Re: Gold instead of Bonds

Post by inferno9898 »

Watched this video the other day and thought it helpful. https://youtu.be/ulgqlQWlPbo

The key takeaway is probably what watchnerd just said, which is that the benefits of gold in a portfolio can be better or more reliably replicated by some other income-producing asset instead.
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nisiprius
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Re: Gold instead of Bonds

Post by nisiprius »

I really dislike your title, "gold instead of bonds," because I think it reflects a serious misunderstanding of the basic nature of these assets. It is important to look at numbers and charts that you dig out for yourself, and not just pay attention to verbal statements, often from people who have something to sell.

"Just curious to know if this would help maintain diversify my portfolio and mitigate risk." In a sense, yes, it would have diversified your portfolio, because all stocks have fluctuated more or less together, and gold has fluctuated somewhat independently. Depending on exactly how you define risk, and what time period you are looking at, gold can mitigate risk.

But gold has fluctuated a lot. This is totally different from the behavior of bonds, which have fluctuated relatively much less. If you rely on bonds, you are relying on something simple and robust: they have fluctuated much less, and this makes sense because a typical bond is a legal contract to pay certain numbers of dollars on certain days. Stocks are not. Gold is not. If you rely on gold, you are relying on observed past tendencies, and you are relying on gold to move up and down at the right time in the right amounts to offset the movements of gold.

The easiest way for a retail investor who does not want to deal with the nuisance, costs, and risks of owning physical gold is to buy an exchanged-traded product from State Street Global Advisors, with the ticker symbol GLD. We can look at GLD since inception (blue), and compare it with other products a Boglehead might choose to hold: bonds (BND, orange), stocks (VTI, green), and a money market mutual fund (VMMXX, yellow).

Source

Image


1) GLD is not at all like bonds. GLD and stocks have had similar wild fluctuations, BND has not.

2) BND has earned much less than either gold or stocks but a good deal more than the money market fund. In my personal set of balances, the relatively small fluctuations of BND have been more than worth it for the additional return it has provided compared to a money market fund (or a bank account)

3) If you had bought GLD on the first day it was available, you would have made about as much in GLD as in stocks. This has historically been very unusual but it is the case for this time period. Since the pattern of ups and downs for GLD and VTI was very different, it is the case that over this time period, there would have been diversification benefit to holding both. In fact, this is the rarely-seen almost perfect case--two assets with similar return, similar risk, but low correlation to each other. You wouldn't have made any more money, but you would have experienced a smoother path and less fluctuation.

How much less fluctuation? Since inception of GLD, the portfolio of VTI and GLD with the lowest volatility would have been about 53% stocks, 47% With a perfect crystal ball, that's the best you could have done with regard to risk reduction over this time period. So, let's compare:

Portfolio 1, 63% VTI, 37% GLD, red. This is the smoothest-growth, lowest-risk portfolio that anyone could have gotten, using VTI and GLD, over this time period.

Portfolio 2, 100% Total Bond (I used VBMFX instead of BND to get a longer time period, but it's the same thing).

Source

Image

I want to be very clear. I am not saying bonds (VBMFX=BND, red line) is "better" than VTI+GLD (blue line). Which is better depends on your personal tastes, on the rest of the portfolio. It depends heavily on the particular time period you look at.

My point is that the smoothest-growing combination GLD with VTI is nowhere near as smooth as the growth of bonds.

Adding gold to a portfolio may sometimes "mitigate risk," but in a completely different way from the way bonds do. I could show support for the idea that gold has been less reliable than bonds, but that's not where I want to go. What I want to emphasize that gold is not at all like bonds.

You should not say "gold instead of bonds."
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redfan11
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Re: Gold instead of Bonds

Post by redfan11 »

watchnerd wrote: Sat Feb 29, 2020 6:51 am
For stock panic protection: Long Treasuries > Gold

For inflation protection: TIPS > Gold

For zero correlation to everything: Cash > Gold

Gold is then left for "other" situations as its super power.

That being said, it is a good diversifier and advances the Efficient Frontier of high equity portfolios in modest amounts. Even Morningstar admits this.
Succinct and to the point, thank you.
nisiprius wrote: Sat Feb 29, 2020 9:42 am I really dislike your title, "gold instead of bonds," because I think it reflects a serious misunderstanding of the basic nature of these assets. It is important to look at numbers and charts that you dig out for yourself, and not just pay attention to verbal statements, often from people who have something to sell.
....
My point is that the smoothest-growing combination GLD with VTI is nowhere near as smooth as the growth of bonds.

Adding gold to a portfolio may sometimes "mitigate risk," but in a completely different way from the way bonds do. I could show support for the idea that gold has been less reliable than bonds, but that's not where I want to go. What I want to emphasize that gold is not at all like bonds.

You should not say "gold instead of bonds."
Thank you for the detailed explanation. So the gist of what you said is, gold cannot be compared to bonds, it is more volatile and can 'sometimes' mitigate risk with the luxury of hindsight it may have fit into a portfolio. It does act as a diversifier, in some cases. And after what you wrote my title would be " Gold as an additional more volatile potentially uncorrelated diversifier"
whodidntante wrote: Fri Feb 28, 2020 11:35 pm You can buy a gold bar for about $650,000. That does not include insurance, but it does include petting privileges.
Haha. My wife has gold jewelry, I tell you there is something I cannot explain in words about touching and holding hold. Something very unique about the metal. Maybe I'm just weird.
firebirdparts wrote: Fri Feb 28, 2020 11:27 pm "recommend" is a pretty strong word. You need to come to your own conclusion. white coat investor has a blog posts called something like "150 portfolios better than yours". Just read it.

There is a thread on here about "golden butterfly." it's long. There's a thread about a modified "golden butterfly". The golden butterfly portfolio was invented by a member of this forum. There are several other "named" famous portfolios that have gold.

I will give you my opinion. In backtesting, gold pops at just the right time to make it look good as a major diversifier over the last 50 years. Will it pop at the right time again? I don't know.
Makes sense thank you.
inferno9898 wrote: Sat Feb 29, 2020 7:30 am Watched this video the other day and thought it helpful. https://youtu.be/ulgqlQWlPbo

The key takeaway is probably what watchnerd just said, which is that the benefits of gold in a portfolio can be better or more reliably replicated by some other income-producing asset instead.
Thanks for the video. It helped me a lot!

After the advise of the community, I am leaning against investing too much in gold. Maybe 2% just because my wife likes jewelry and like
annu wrote: Fri Feb 28, 2020 11:30 pm I invest once a year every Feb 14th....I think it's like 2% of my total portfolio :sharebeer
Ill just buy something once in a while for my wife, and call it an investment and a day.

Thanks everyone!
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Re: Gold instead of Bonds

Post by 3funder »

Nope.
Global stocks, US bonds, and time.
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watchnerd
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Re: Gold instead of Bonds

Post by watchnerd »

inferno9898 wrote: Sat Feb 29, 2020 7:30 am Watched this video the other day and thought it helpful. https://youtu.be/ulgqlQWlPbo

The key takeaway is probably what watchnerd just said, which is that the benefits of gold in a portfolio can be better or more reliably replicated by some other income-producing asset instead.
Thank you for that awesome video.

It was a great analysis of the pros and cons of gold.

Until he got to the part about Canadian dollars..... :wink:
60% Global Market Stocks (VT,FM) | 38% Global Market Bonds | 2% crypto & securitized gold || LMP TIPS/STRIPS || RSU + ESPP
seajay
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Re: Gold instead of Bonds

Post by seajay »

Central banks like to induce inflation as that tends to drive having to invest money in order to avoid it losing purchase power. And where those 'gains' can be taxed. A indication of that drive can be seen when you compare how currencies have broadly tended to decline relative to gold.

Image

So whilst gold pays no interest, it doesn't have to, its purchase power broadly is maintained, but in a very volatile manner. In contrast cash has to be invested in order to avoid loss of purchase power.

Investors are rewarded for taking on volatility risk. Combine multiple volatile assets and ideally if one has swung high as another has swung low then the volatility of the combination might be low but where the investor is broadly rewarded by the individuals. If anything investor should embrace volatility in individual assets, as diversification combined with low/no correlations and rebalancing (trading) those swings tends to provide rewards.

Relative to bonds, gold is somewhat like a very long dated TIP bond. Around 3 times the volatility of a TIPS fund. Some investors prefer to shift bond risk over to the equity side, perhaps opting for 80/20 stock/long dated TIPS instead of 60/40 stock/bonds. Swapping out the TIPS for gold and 80/20 stock/gold versus 60/40 stock/bonds since 1987 have broadly yielded similar rewards.
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