Whilst I believe ASX shares are one of the best long-term wealth generating assets, they’re also one of the most volatile. Everyone who invests in shares knows that a 20%, 30% or 40% drop in the value of the share market is simply a risk you have to deal with.
Of course, some investors are more risk averse than others. The era of record low interest rates that we now live in means that more conservative investors who might not traditionally want a larger exposure to shares have no choice. This is because government bonds, term deposits and other lower-risk assets that these investors might have once employed as portfolio ‘insurance’ are no longer paying a real rate of return.
In their place, many commentators, including the likes of Ray Dalio, are spruiking the benefits of gold as the best way to ‘insure’ your portfolio against stocks. Dalio says gold is like cash, but better, as it protects against inflation and both economic and geopolitical risk.
But is he right? Is gold really an effective way to ‘insure’ your portfolio?
Gold as insurance
I think there is a case to be made for gold. The yellow metal has indeed had a strong negative correlation to stocks. During the GFC and its aftermath, gold was the best performing asset by a mile – appreciating more than 110% between 2007 and 2011 at a time when the share market lost around 50% of its value at one point.
Because of its static supply and limited role in industrial use, gold is also not affected by the business cycle like other precious metals such as silver and platinum. This also makes it relatively inflation-proof (and some also argue that it is a good asset to hold in a deflationary environment as well).
Ray Dalio recommends a 5–10% allocation of your portfolio to gold as an insurance policy and I think this has merit. Today, you don’t even have to own physical bullion. Exchange traded funds (ETFs) like the ETFS Physical Gold ETF (ASX: GOLD) give investors an easy way to buy into gold without having to worry about storage, shipping or theft.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.