Replacing total bond index with gold ETF in my portfolio?

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Tenesmus83
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Replacing total bond index with gold ETF in my portfolio?

Post by Tenesmus83 » Tue Jun 30, 2020 8:45 pm

I'm looking at switching out my VBTLX with a gold ETF as part of my 3 fund portfolio. Reason being low interest rates
for the forseeable future really argue against owning bonds. If the purpose of of bonds is to act as a portfolio stabilizer,
gold appears to be a good alternative as an inflation hedge.

Living Free
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by Living Free » Tue Jun 30, 2020 8:49 pm

Gold seems really popular lately, based on seeing two threads recently asking about abandoning bonds and using gold instead: viewtopic.php?f=10&t=318887.

Abandoning bonds completely seems excessive. Holding a small amount of gold is probably fine.

tommyt
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by tommyt » Tue Jun 30, 2020 8:52 pm

Living Free wrote:
Tue Jun 30, 2020 8:49 pm
Gold seems really popular lately, based on seeing two threads recently asking about abandoning bonds and using gold instead: viewtopic.php?f=10&t=318887.

Abandoning bonds completely seems excessive. Holding a small amount of gold is probably fine.
Seriously, I feel like Bogleheads is being raided by the companies selling gold on commercial breaks.

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David Jay
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by David Jay » Tue Jun 30, 2020 9:05 pm

Tenesmus83 wrote:
Tue Jun 30, 2020 8:45 pm
If the purpose of of bonds is to act as a portfolio stabilizer, gold appears to be a good alternative as an inflation hedge.
This statement is a non-sequitur.

Bonds reduce volatility. By comparison, gold is quite volatile, just look at a graph of the last 6 months: $1478 to $1782, or a price change of 20.5%. In just six months.

Equities are a better inflation hedge than gold, per Bernstein's "Deep Risk".

Which do you want, reduced volatility or inflation hedging? In either case, the answer is not Gold.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Willmunny
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by Willmunny » Tue Jun 30, 2020 9:29 pm

tommyt wrote:
Tue Jun 30, 2020 8:52 pm
Living Free wrote:
Tue Jun 30, 2020 8:49 pm
Gold seems really popular lately, based on seeing two threads recently asking about abandoning bonds and using gold instead: viewtopic.php?f=10&t=318887.

Abandoning bonds completely seems excessive. Holding a small amount of gold is probably fine.
Seriously, I feel like Bogleheads is being raided by the companies selling gold on commercial breaks.
Well if one had a time machine and went back to the turn of the century, gold would have been the place to be rather than equities or bonds. I can certainly see why people have taken notice. Of course, buying on price strength can be risky. The prior 20 year period (1980 - 2000) saw gold get crushed, both nominally and much more so in terms of real purchasing power. Stocks and bonds were the place to be during that period. I wish I knew the place to be for 2020 - 2040.

Gold could do well over the next 20 years. It also could result in a large loss of real purchasing power or even nominal value. Or it may just roughly keep up with inflation. Who knows. If if does well or at least keeps up with inflation, you would likely not regret it if you decide to make a move given current bond valuations. If its performance is anything like the period 1980 - 2000, you will definitely regret it with hindsight.

I don't think Bogleheads have been swayed by slick gold sellers on television any more than they have been swayed by financial pundits to decrease allocations to international equities or even abandon international allthgother. Of course, that is most likely due to the fact that domestic equities outperformed international very significantly since the great recession beginning in 2008 - 2009. So, I think Bogleheads, like many humans in general, are susceptible to performance chasing.

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unclescrooge
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by unclescrooge » Tue Jun 30, 2020 9:34 pm

David Jay wrote:
Tue Jun 30, 2020 9:05 pm
Tenesmus83 wrote:
Tue Jun 30, 2020 8:45 pm
If the purpose of of bonds is to act as a portfolio stabilizer, gold appears to be a good alternative as an inflation hedge.
This statement is a non-sequitur.

Bonds reduce volatility. By comparison, gold is quite volatile, just look at a graph of the last 6 months: $1478 to $1782, or a price change of 20.5%. In just six months.

Equities are a better inflation hedge than gold, per Bernstein's "Deep Risk".

Which do you want, reduced volatility or inflation hedging? In either case, the answer is not Gold.
Actually, adding a small amount of gold to a portfolio does reduce volatility, despite it's higher volatility and lower returns.

https://ofdollarsanddata.com/why-is-gold-valuable/

Wanderingwheelz
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by Wanderingwheelz » Tue Jun 30, 2020 9:58 pm

Bonds are misunderstood because of very low rates and the fear that they’re not going to go lower- ever. They may, in fact, not go lower, but if they do you want to understand convexity and how that’ll positively affect your total return.

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CyclingDuo
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by CyclingDuo » Wed Jul 01, 2020 7:30 am

Tenesmus83 wrote:
Tue Jun 30, 2020 8:45 pm
I'm looking at switching out my VBTLX with a gold ETF as part of my 3 fund portfolio. Reason being low interest rates for the forseeable future really argue against owning bonds. If the purpose of of bonds is to act as a portfolio stabilizer, gold appears to be a good alternative as an inflation hedge.
That ought to work out exceptionally well. :shock:

Give it a name and add it to these lists of portfolios to see how it does over time. :twisted:

https://www.whitecoatinvestor.com/150-p ... han-yours/

https://www.portfolioeinstein.com/235-p ... han-yours/
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Nate79
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by Nate79 » Wed Jul 01, 2020 5:03 pm

A horrible, horrendous idea. If you want to hold a little gold then fine. But it is in no way even remotely a substitute for bonds in a portfolio.

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1789
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by 1789 » Wed Jul 01, 2020 5:10 pm

What are you expecting from a bond index vs gold ETF ?
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telemark
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by telemark » Wed Jul 01, 2020 5:56 pm

The interest rates on gold are even lower.

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willthrill81
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by willthrill81 » Wed Jul 01, 2020 6:05 pm

unclescrooge wrote:
Tue Jun 30, 2020 9:34 pm
David Jay wrote:
Tue Jun 30, 2020 9:05 pm
Tenesmus83 wrote:
Tue Jun 30, 2020 8:45 pm
If the purpose of of bonds is to act as a portfolio stabilizer, gold appears to be a good alternative as an inflation hedge.
This statement is a non-sequitur.

Bonds reduce volatility. By comparison, gold is quite volatile, just look at a graph of the last 6 months: $1478 to $1782, or a price change of 20.5%. In just six months.

Equities are a better inflation hedge than gold, per Bernstein's "Deep Risk".

Which do you want, reduced volatility or inflation hedging? In either case, the answer is not Gold.
Actually, adding a small amount of gold to a portfolio does reduce volatility, despite it's higher volatility and lower returns.

https://ofdollarsanddata.com/why-is-gold-valuable/
One small correction: has (rather than does).

You have made the important point that many have overlooked. In the sum total of the last 45 years (i.e. the entire time frame in which U.S. investors could legally own gold), a small (i.e. 5-20%) allocation to it reduced volatility and downside risk without a lockstep reduction in returns (i.e. more efficient portfolio). This is not the result of recent performance or even a single decade.

The components of a portfolio are not nearly as important as the entire portfolio. The total is more than the sum of its parts.

That said, completely abandoning bonds for gold does not seem prudent for most unless they only had a 20% or smaller allocation to bonds.
“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

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nisiprius
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by nisiprius » Wed Jul 01, 2020 6:30 pm

Have you looked at the actual historic behavior of gold and intermediate-term bonds, in numbers, on a chart? I used the SBBI Intermediate-Term Government Bonds data series because Total Bond doesn't go back past 1987.

Do you really think that these two are similar in any way, and that gold can be a "replacement" for bonds?

Gold is a highly volatile, fluctuating, risky asset. Bonds are relatively low volatility.

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jason2459
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by jason2459 » Wed Jul 01, 2020 9:28 pm

nisiprius wrote:
Wed Jul 01, 2020 6:30 pm
Have you looked at the actual historic behavior of gold and intermediate-term bonds, in numbers, on a chart? I used the SBBI Intermediate-Term Government Bonds data series because Total Bond doesn't go back past 1987.

Do you really think that these two are similar in any way, and that gold can be a "replacement" for bonds?

Gold is a highly volatile, fluctuating, risky asset. Bonds are relatively low volatility.

Image
You can do the same with short term treasuries and they start and end in the same spot with the short term treasuries slightly ahead.

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willthrill81
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by willthrill81 » Wed Jul 01, 2020 10:21 pm

nisiprius wrote:
Wed Jul 01, 2020 6:30 pm
Have you looked at the actual historic behavior of gold and intermediate-term bonds, in numbers, on a chart? I used the SBBI Intermediate-Term Government Bonds data series because Total Bond doesn't go back past 1987.

Do you really think that these two are similar in any way, and that gold can be a "replacement" for bonds?

Gold is a highly volatile, fluctuating, risky asset. Bonds are relatively low volatility.

Image
Such comparisons have some merit, but they emphasize the individual components of one's portfolio and de-emphasizes the sum total of said portfolio. Your knowledge of modern portfolio theory backs this up.
“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

JamesDean44
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by JamesDean44 » Wed Jul 01, 2020 11:30 pm

More information is needed. In general terms and in the abstract, gold isn't a replacement for total bond. If total bond is 10% of your portfolio, then "replacing" it with 5% gold and 5% long term treasuries or 10% gold might satisfy your goals. Much different if you're talking about replacing a 50% allocation to TBM with gold.

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David Jay
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Re: Replacing total bond index with gold ETF in my portfolio?

Post by David Jay » Thu Jul 02, 2020 8:42 am

unclescrooge wrote:
Tue Jun 30, 2020 9:34 pm
David Jay wrote:
Tue Jun 30, 2020 9:05 pm
Tenesmus83 wrote:
Tue Jun 30, 2020 8:45 pm
If the purpose of of bonds is to act as a portfolio stabilizer, gold appears to be a good alternative as an inflation hedge.
This statement is a non-sequitur.

Bonds reduce volatility. By comparison, gold is quite volatile, just look at a graph of the last 6 months: $1478 to $1782, or a price change of 20.5%. In just six months.

Equities are a better inflation hedge than gold, per Bernstein's "Deep Risk".

Which do you want, reduced volatility or inflation hedging? In either case, the answer is not Gold.
Actually, adding a small amount of gold to a portfolio does reduce volatility, despite it's higher volatility and lower returns.

https://ofdollarsanddata.com/why-is-gold-valuable/
While your statement may be true, the article you linked does not support the proposition that replacing bonds with gold (the OPs stated intent) reduces volatility.

The article replaces 8.3% of SP500, 8.3% of emerging market equity and 8.3% of LT bonds with gold. So 2/3 of the (new) gold allocation used in the article came from stocks.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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