Is there any reason a buy-and-hold investor would buy gold?

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simpleman1
Posts: 14
Joined: Sat Mar 10, 2018 8:20 pm

Re: Is there any reason a buy-and-hold investor would buy gold?

Post by simpleman1 » Tue Mar 13, 2018 2:39 pm

jastevenson wrote:
Sat Apr 15, 2017 2:27 pm
When you invest in a index fund, the premise is that you own a piece of a company. So long-term growth in the size and profit of a company results in a higher stock price when

Gold rises and falls in value, but the value seems to change based more on things like political climate and global security rather than something more tangible like profit growth (e.g., gold prices rises during a war).

So is there any reason for a long term investor to buy gold?
Thank you very much for your question. Yes, buying and holding physical gold can help to minimize real-world risk. For example, the current Venezuela scenario:

http://abcnews.go.com/International/wir ... a-53696691

alfaspider
Posts: 1333
Joined: Wed Sep 09, 2015 4:44 pm

Re: Is there any reason a buy-and-hold investor would buy gold?

Post by alfaspider » Tue Mar 13, 2018 2:42 pm

simpleman1 wrote:
Tue Mar 13, 2018 2:39 pm
jastevenson wrote:
Sat Apr 15, 2017 2:27 pm
When you invest in a index fund, the premise is that you own a piece of a company. So long-term growth in the size and profit of a company results in a higher stock price when

Gold rises and falls in value, but the value seems to change based more on things like political climate and global security rather than something more tangible like profit growth (e.g., gold prices rises during a war).

So is there any reason for a long term investor to buy gold?
Thank you very much for your question. Yes, buying and holding physical gold can help to minimize real-world risk. For example, the current Venezuela scenario:

http://abcnews.go.com/International/wir ... a-53696691
I'd much rather have USD on hand than gold if I were stuck in Venezuela today. Even better would be a U.S. bank and brokerage account.

All Seasons
Posts: 28
Joined: Sun Dec 10, 2017 4:14 pm

Re: Is there any reason a buy-and-hold investor would buy gold?

Post by All Seasons » Tue Mar 13, 2018 2:57 pm

Yes, but you can't use total stock/total bond indexes back to 1972.

As for 20-25%- I'm not sure it really matters that much if you are comparing to bonds. With the exception of a few limited time periods, a 70/30 stock/bond portfolio performs similarly to a 70/30 stock/gold portfolio, with the gold portfolio slightly under performing on return and no significant volatility difference.
Use intermediate term treasuries as a proxy to total bond market and the tool will go back to '72.
The market portfolio is always a legitimate portfolio.

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willthrill81
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Re: Is there any reason a buy-and-hold investor would buy gold?

Post by willthrill81 » Tue Mar 13, 2018 2:59 pm

alfaspider wrote:
Tue Mar 13, 2018 2:24 pm
willthrill81 wrote:
Tue Mar 13, 2018 2:21 pm
alfaspider wrote:
Tue Mar 13, 2018 12:40 pm
willthrill81 wrote:
Tue Mar 13, 2018 11:34 am
alfaspider wrote:
Tue Mar 13, 2018 10:37 am


Out of curiosity, I just did with portfolio visualizer using the maximum date range (20 years). One portfolio was a standard 70/30 bogglehead portfolio allocated to total stock and total bond. The other was a similar portfolio but 70/20/10 with 10% gold. The results were nearly identical, but the traditional BH portfolio came out ahead vs the portfolio with gold (165,500 vs 160,000 for an initial $10k investment). Likewise, volatility wasn't materially different with the worst years and best years and max drawdown within 1%. Obviously, you could come to different conclusions with different date ranges, but I'm not really seeing what you are claiming. I'd also point out that 1998 was the beginning of a bull run for gold, so other date ranges are probably worse.

https://www.portfoliovisualizer.com/bac ... sisResults
From 1972-2017, a portfolio with 70% TSM and 30% TBM returned 9.81%, while moving to 20% TBM and 10% gold increased the return to 10.18%. From 1998-2017 (last 20 years), the portfolio with gold outperformed by .30% annually.
My results are actually January 1997 to January 1998 (max for portfolio visualizer) for these three asset classes, where gold decreased CAGR from 9.41 to 9.33%. If we take a more recent sample, from Jan 2013 to Jan 2018, the portfolio with gold decreases CAGR by approximately .5%. However, all that is beside the point. In no scenario is the end result materially different in a 70/20/10 portfolio with gold than a simple 70/30 unless you cherry pick ideal scenarios for one asset class. Even the one absolute best recent time frames for the portfolio with gold (January 2007 to December 2009) only results in a CAGR difference of about 1% and a negligible impact on overall portfolio volatility.

My original point was that a 10% allocation one way or another just isn't that material to your outcome if you are choosing between asset classes with similar purposes in your portfolio (i.e. growth assets like equities or protective assets like bonds or gold).
Portfolio Visualizer lets you view the impact of gold all the way back to 1972. Go the 'asset allocation' link here.

I agree with you that a 10% allocation to anything isn't likely to move the needle of the overall portfolio much. For those wanting to include gold in their portfolio (I don't currently at least), I think 20-25% is a more reasonable proportion.
Yes, but you can't use total stock/total bond indexes back to 1972.
You can use total stock market indexes but not total bond. But ITT substitutes TBM well.
alfaspider wrote:
Tue Mar 13, 2018 2:24 pm
As for 20-25%- I'm not sure it really matters that much if you are comparing to bonds. With the exception of a few limited time periods, a 70/30 stock/bond portfolio performs similarly to a 70/30 stock/gold portfolio, with the gold portfolio slightly under performing on return and no significant volatility difference.
This is a situation where pure backtesting doesn't tell the whole story, especially since inflation has been low for the last two decades. Gold has historically done far better than bonds during periods of high inflation. For instance, from 1977-1981, ITT had a real annual return of -5.58% (-25% real drawdown over that period; so much for 'safe' bonds), while gold had a real annual return of 12.98%. As such, if moving a portion of one's bonds into gold can help to protect against inflation and not significantly harm long-term returns, it sounds like a good asset to hold to me.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

alfaspider
Posts: 1333
Joined: Wed Sep 09, 2015 4:44 pm

Re: Is there any reason a buy-and-hold investor would buy gold?

Post by alfaspider » Tue Mar 13, 2018 3:04 pm

willthrill81 wrote:
Tue Mar 13, 2018 2:59 pm
alfaspider wrote:
Tue Mar 13, 2018 2:24 pm
willthrill81 wrote:
Tue Mar 13, 2018 2:21 pm
alfaspider wrote:
Tue Mar 13, 2018 12:40 pm
willthrill81 wrote:
Tue Mar 13, 2018 11:34 am


From 1972-2017, a portfolio with 70% TSM and 30% TBM returned 9.81%, while moving to 20% TBM and 10% gold increased the return to 10.18%. From 1998-2017 (last 20 years), the portfolio with gold outperformed by .30% annually.
My results are actually January 1997 to January 1998 (max for portfolio visualizer) for these three asset classes, where gold decreased CAGR from 9.41 to 9.33%. If we take a more recent sample, from Jan 2013 to Jan 2018, the portfolio with gold decreases CAGR by approximately .5%. However, all that is beside the point. In no scenario is the end result materially different in a 70/20/10 portfolio with gold than a simple 70/30 unless you cherry pick ideal scenarios for one asset class. Even the one absolute best recent time frames for the portfolio with gold (January 2007 to December 2009) only results in a CAGR difference of about 1% and a negligible impact on overall portfolio volatility.

My original point was that a 10% allocation one way or another just isn't that material to your outcome if you are choosing between asset classes with similar purposes in your portfolio (i.e. growth assets like equities or protective assets like bonds or gold).
Portfolio Visualizer lets you view the impact of gold all the way back to 1972. Go the 'asset allocation' link here.

I agree with you that a 10% allocation to anything isn't likely to move the needle of the overall portfolio much. For those wanting to include gold in their portfolio (I don't currently at least), I think 20-25% is a more reasonable proportion.
Yes, but you can't use total stock/total bond indexes back to 1972.
You can use total stock market indexes but not total bond. But ITT substitutes TBM well.
alfaspider wrote:
Tue Mar 13, 2018 2:24 pm
As for 20-25%- I'm not sure it really matters that much if you are comparing to bonds. With the exception of a few limited time periods, a 70/30 stock/bond portfolio performs similarly to a 70/30 stock/gold portfolio, with the gold portfolio slightly under performing on return and no significant volatility difference.
This is a situation where pure backtesting doesn't tell the whole story, especially since inflation has been low for the last two decades. Gold has historically done far better than bonds during periods of high inflation. For instance, from 1977-1981, ITT had a real annual return of -5.58% (-25% real drawdown over that period; so much for 'safe' bonds), while gold had a real annual return of 12.98%. As such, if moving a portion of one's bonds into gold can help to protect against inflation and not significantly harm long-term returns, it sounds like a good asset to hold to me.
I would argue the 1977-1981 stagflation was a very unique and rare situation. Plus, the 1981 end date is quite cherry picked given that gold crashed shortly thereafter.

All Seasons
Posts: 28
Joined: Sun Dec 10, 2017 4:14 pm

Re: Is there any reason a buy-and-hold investor would buy gold?

Post by All Seasons » Tue Mar 13, 2018 3:19 pm

alfaspider wrote:
Tue Mar 13, 2018 3:04 pm
willthrill81 wrote:
Tue Mar 13, 2018 2:59 pm
alfaspider wrote:
Tue Mar 13, 2018 2:24 pm
willthrill81 wrote:
Tue Mar 13, 2018 2:21 pm
alfaspider wrote:
Tue Mar 13, 2018 12:40 pm


My results are actually January 1997 to January 1998 (max for portfolio visualizer) for these three asset classes, where gold decreased CAGR from 9.41 to 9.33%. If we take a more recent sample, from Jan 2013 to Jan 2018, the portfolio with gold decreases CAGR by approximately .5%. However, all that is beside the point. In no scenario is the end result materially different in a 70/20/10 portfolio with gold than a simple 70/30 unless you cherry pick ideal scenarios for one asset class. Even the one absolute best recent time frames for the portfolio with gold (January 2007 to December 2009) only results in a CAGR difference of about 1% and a negligible impact on overall portfolio volatility.

My original point was that a 10% allocation one way or another just isn't that material to your outcome if you are choosing between asset classes with similar purposes in your portfolio (i.e. growth assets like equities or protective assets like bonds or gold).
Portfolio Visualizer lets you view the impact of gold all the way back to 1972. Go the 'asset allocation' link here.

I agree with you that a 10% allocation to anything isn't likely to move the needle of the overall portfolio much. For those wanting to include gold in their portfolio (I don't currently at least), I think 20-25% is a more reasonable proportion.
Yes, but you can't use total stock/total bond indexes back to 1972.
You can use total stock market indexes but not total bond. But ITT substitutes TBM well.
alfaspider wrote:
Tue Mar 13, 2018 2:24 pm
As for 20-25%- I'm not sure it really matters that much if you are comparing to bonds. With the exception of a few limited time periods, a 70/30 stock/bond portfolio performs similarly to a 70/30 stock/gold portfolio, with the gold portfolio slightly under performing on return and no significant volatility difference.
This is a situation where pure backtesting doesn't tell the whole story, especially since inflation has been low for the last two decades. Gold has historically done far better than bonds during periods of high inflation. For instance, from 1977-1981, ITT had a real annual return of -5.58% (-25% real drawdown over that period; so much for 'safe' bonds), while gold had a real annual return of 12.98%. As such, if moving a portion of one's bonds into gold can help to protect against inflation and not significantly harm long-term returns, it sounds like a good asset to hold to me.
I would argue the 1977-1981 stagflation was a very unique and rare situation. Plus, the 1981 end date is quite cherry picked given that gold crashed shortly thereafter.
Unique, but not that unique I don’t think. When you expand the data set to international and go back to, say, 1900, it’s quite a common event. Portfolio visualizer primarily has data for a period that was unusually good for stocks and bonds compared to the broad scope of history. A 1929 - 1948 period for stocks included in the data would change the trajectory of a lot of debates on these forums i would imagine.
The market portfolio is always a legitimate portfolio.

alfaspider
Posts: 1333
Joined: Wed Sep 09, 2015 4:44 pm

Re: Is there any reason a buy-and-hold investor would buy gold?

Post by alfaspider » Tue Mar 13, 2018 3:25 pm

All Seasons wrote:
Tue Mar 13, 2018 3:19 pm
alfaspider wrote:
Tue Mar 13, 2018 3:04 pm
willthrill81 wrote:
Tue Mar 13, 2018 2:59 pm
alfaspider wrote:
Tue Mar 13, 2018 2:24 pm
willthrill81 wrote:
Tue Mar 13, 2018 2:21 pm


Portfolio Visualizer lets you view the impact of gold all the way back to 1972. Go the 'asset allocation' link here.

I agree with you that a 10% allocation to anything isn't likely to move the needle of the overall portfolio much. For those wanting to include gold in their portfolio (I don't currently at least), I think 20-25% is a more reasonable proportion.
Yes, but you can't use total stock/total bond indexes back to 1972.
You can use total stock market indexes but not total bond. But ITT substitutes TBM well.
alfaspider wrote:
Tue Mar 13, 2018 2:24 pm
As for 20-25%- I'm not sure it really matters that much if you are comparing to bonds. With the exception of a few limited time periods, a 70/30 stock/bond portfolio performs similarly to a 70/30 stock/gold portfolio, with the gold portfolio slightly under performing on return and no significant volatility difference.
This is a situation where pure backtesting doesn't tell the whole story, especially since inflation has been low for the last two decades. Gold has historically done far better than bonds during periods of high inflation. For instance, from 1977-1981, ITT had a real annual return of -5.58% (-25% real drawdown over that period; so much for 'safe' bonds), while gold had a real annual return of 12.98%. As such, if moving a portion of one's bonds into gold can help to protect against inflation and not significantly harm long-term returns, it sounds like a good asset to hold to me.
I would argue the 1977-1981 stagflation was a very unique and rare situation. Plus, the 1981 end date is quite cherry picked given that gold crashed shortly thereafter.
Unique, but not that unique I don’t think. When you expand the data set to international and go back to, say, 1900, it’s quite a common event. Portfolio visualizer primarily has data for a period that was unusually good for stocks and bonds compared to the broad scope of history. A 1929 - 1948 period for stocks included in the data would change the trajectory of a lot of debates on these forums i would imagine.
But the great depression actually saw deflation, so it was very different economically speaking from the late 70s stagflation. High inflation coupled with a slow economic decline is quite rare in the developed world. Gold did see significant real appreciation during the great depression, but nothing like the stratospheric spike that occurred from 1979-80. Gold also faced a long slow decline from the mid 1930s until 1970s.

Also interesting historical tidbit- gold was not particularly useful during the panic of 1907 as it declined from around 1900 until just before the great depression.

All Seasons
Posts: 28
Joined: Sun Dec 10, 2017 4:14 pm

Re: Is there any reason a buy-and-hold investor would buy gold?

Post by All Seasons » Tue Mar 13, 2018 3:28 pm

alfaspider wrote:
Tue Mar 13, 2018 3:25 pm
All Seasons wrote:
Tue Mar 13, 2018 3:19 pm
alfaspider wrote:
Tue Mar 13, 2018 3:04 pm
willthrill81 wrote:
Tue Mar 13, 2018 2:59 pm
alfaspider wrote:
Tue Mar 13, 2018 2:24 pm


Yes, but you can't use total stock/total bond indexes back to 1972.
You can use total stock market indexes but not total bond. But ITT substitutes TBM well.
alfaspider wrote:
Tue Mar 13, 2018 2:24 pm
As for 20-25%- I'm not sure it really matters that much if you are comparing to bonds. With the exception of a few limited time periods, a 70/30 stock/bond portfolio performs similarly to a 70/30 stock/gold portfolio, with the gold portfolio slightly under performing on return and no significant volatility difference.
This is a situation where pure backtesting doesn't tell the whole story, especially since inflation has been low for the last two decades. Gold has historically done far better than bonds during periods of high inflation. For instance, from 1977-1981, ITT had a real annual return of -5.58% (-25% real drawdown over that period; so much for 'safe' bonds), while gold had a real annual return of 12.98%. As such, if moving a portion of one's bonds into gold can help to protect against inflation and not significantly harm long-term returns, it sounds like a good asset to hold to me.
I would argue the 1977-1981 stagflation was a very unique and rare situation. Plus, the 1981 end date is quite cherry picked given that gold crashed shortly thereafter.
Unique, but not that unique I don’t think. When you expand the data set to international and go back to, say, 1900, it’s quite a common event. Portfolio visualizer primarily has data for a period that was unusually good for stocks and bonds compared to the broad scope of history. A 1929 - 1948 period for stocks included in the data would change the trajectory of a lot of debates on these forums i would imagine.
But the great depression actually saw deflation, so it was very different economically speaking from the late 70s stagflation. High inflation coupled with a slow economic decline is quite rare in the developed world. Gold did see significant real appreciation during the great depression, but nothing like the stratospheric spike that occurred from 1979-80. Gold also faced a long slow decline from the mid 1930s until 1970s.
Oh, totally. I just meant more like Weimar Germany in the 1920s or China in the 1940s when it comes to the gold bit.
The market portfolio is always a legitimate portfolio.

alfaspider
Posts: 1333
Joined: Wed Sep 09, 2015 4:44 pm

Re: Is there any reason a buy-and-hold investor would buy gold?

Post by alfaspider » Tue Mar 13, 2018 3:38 pm

All Seasons wrote:
Tue Mar 13, 2018 3:28 pm
alfaspider wrote:
Tue Mar 13, 2018 3:25 pm
All Seasons wrote:
Tue Mar 13, 2018 3:19 pm
alfaspider wrote:
Tue Mar 13, 2018 3:04 pm
willthrill81 wrote:
Tue Mar 13, 2018 2:59 pm


You can use total stock market indexes but not total bond. But ITT substitutes TBM well.



This is a situation where pure backtesting doesn't tell the whole story, especially since inflation has been low for the last two decades. Gold has historically done far better than bonds during periods of high inflation. For instance, from 1977-1981, ITT had a real annual return of -5.58% (-25% real drawdown over that period; so much for 'safe' bonds), while gold had a real annual return of 12.98%. As such, if moving a portion of one's bonds into gold can help to protect against inflation and not significantly harm long-term returns, it sounds like a good asset to hold to me.
I would argue the 1977-1981 stagflation was a very unique and rare situation. Plus, the 1981 end date is quite cherry picked given that gold crashed shortly thereafter.
Unique, but not that unique I don’t think. When you expand the data set to international and go back to, say, 1900, it’s quite a common event. Portfolio visualizer primarily has data for a period that was unusually good for stocks and bonds compared to the broad scope of history. A 1929 - 1948 period for stocks included in the data would change the trajectory of a lot of debates on these forums i would imagine.
But the great depression actually saw deflation, so it was very different economically speaking from the late 70s stagflation. High inflation coupled with a slow economic decline is quite rare in the developed world. Gold did see significant real appreciation during the great depression, but nothing like the stratospheric spike that occurred from 1979-80. Gold also faced a long slow decline from the mid 1930s until 1970s.
Oh, totally. I just meant more like Weimar Germany in the 1920s or China in the 1940s when it comes to the gold bit.
If you are unfortunate enough to live through an event analogous to the demise of Weimar Germany or 1940s China, financial ruin is the least of your worries. All the gold in the world would do you little good if you were a Jewish person in Germany or identified as anti-communist in 1949 China (nor, for that matter, would all the lead and brass). I doubt many fail to flee such situations because they lack sufficient savings, but mostly because of natural attachments to one's homeland or a failure to understand the danger before its too late.

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