Commodities/Gold needed for true diversification

tranquility1

Good morning.

Watched an interesting video last night by Artemis Capital Management. 

In a nutshell, they said that you aren't diversified with just equities and bonds as they both perform the same way.

To be truly diversified you need gold and commodities, as these will gain value when the market tanks.

They call this the 100 year portfolio, as it will survive anything and preserve wealth.

They say that portfolios (and investors) for the past 40 years have become too dependant on equities/property, but that this is just a blip rather than the rule, but people investing today don't know any different.

So, should we all be selling some equities and reallocating to gold and/or commodities? And if so, how much? And which ones?

To my mind, if you are to go down this route, then it seems like a decent chunk should be used. 20% of portfolio. Perhaps more.

ColdIron

It depends upon your objective. If your overriding objective is to achieve maximum diversification (perhaps because your think that it is an unalloyed 'good thing') this may help. But most people have more tangible objectives, for instance growth or income. A growth investor may consider they have time on their side to ride out periods of volatility (which diversification seeks to mitigate) and see it as a drag on long term performance. An income investor may not be bothered by short term market movements as long as the regular returns keep rolling in, gold provides no income at all so again would be a drag on performance

A high level of diversification may be useful for example in a wealth preservation portfolio but of far less use in others

What you are trying to achieve will determine what you invest in. Horses for courses

StellaN

I hold Polymetal (POLY) and Fresnillo (FRES) in my portfolio which are both currently at quite a low share price. I bought in at what I feel is a good price so I'm hopeful in future they should increase in value but they are volatile especially FRES.

tranquility1

This is the chart Artemis use.


I guess the strength of including commodities and/or gold is for when/if the do-do *really* hits the fan? 

tranquility1

StellaN said:

I hold Polymetal (POLY) and Fresnillo (FRES) in my portfolio which are both currently at quite a low share price. I bought in at what I feel is a good price so I'm hopeful in future they should increase in value but they are volatile especially FRES.

I will check those out.

I currently hold a few percent of my portfolio in both iShares Physical Gold and iShares Physical Silver.  I think I'm right in saying that iShares also have a general Commodities ETF, but I've yet to research it.

Perhaps those three iShares ETFs (gold, silver, commodities) are sufficient?

Malthusian

To be truly diversified you need gold and commodities, as these will gain value when the market tanks.

No they won't. Sometimes gold / commodities go up when equities go down. In other crashes they haven't.

"You need to invest in something other than equities and bonds, gold is something else, therefore you should invest in gold" is a variant of the Politician's Syllogism (something must be done, this is something, therefore we must do this). It is logically equivalent to "dogs have four legs, my cat has four legs, therefore my dog is a cat"

They call this the 100 year portfolio, as it will survive anything and preserve wealth.

A portfolio of 100% globally diversified equities will also survive anything and preserve wealth for 1,000 years, as long as you don't cash it in during a crash. (Where "anything" is defined as "anything apart from total economic collapse or other apocalypse scenarios").

To my mind, if you are to go down this route, then it seems like a decent chunk should be used. 20% of portfolio. Perhaps more.

20% is far too much to have in zero-yielding shiny metal for the vast majority of retail investors (same applies to pigs or wheat). The expected return on gold is zero minus trading costs and most retail investors have no reason to give up that much potential return just to satisfy marketing claims based on bad logic.

tranquility1

Malthusian said:

To be truly diversified you need gold and commodities, as these will gain value when the market tanks.

No they won't. Sometimes gold / commodities go up when equities go down. In other crashes they haven't.

"You need to invest in something other than equities and bonds, gold is something else, therefore you should invest in gold" is a variant of the Politician's Syllogism (something must be done, this is something, therefore we must do this). It is logically equivalent to "dogs have four legs, my cat has four legs, therefore my dog is a cat"

They call this the 100 year portfolio, as it will survive anything and preserve wealth.

A portfolio of 100% globally diversified equities will also survive anything and preserve wealth for 1,000 years, as long as you don't cash it in during a crash. (Where "anything" is defined as "anything apart from total economic collapse or other apocalypse scenarios").

To my mind, if you are to go down this route, then it seems like a decent chunk should be used. 20% of portfolio. Perhaps more.

20% is far too much to have in zero-yielding shiny metal for the vast majority of retail investors (same applies to pigs or wheat). The expected return on gold is zero minus trading costs and most retail investors have no reason to give up that much potential return just to satisfy marketing claims based on bad logic.

If inflation sky rockets, how would you expect equities and gold/commodities to behave?

pip895

I have about 5% in gold - I think its main purpose is to make me feel better when everything else tanks.  I am not sufficiently enamored (for the reasons outlined in many of the posts above) to hold sufficient to actually perform any other useful purpose.  I purchased most of it at quite a low point so it sits there showing a nice profit luckily..

Albermarle

Infrastructure funds are also  often suggested as a diversifier .

Thrugelmir

Portfolio diversification (and construction) is hardly anything new. There's much to read up on the topic. With the boom in interest in global equity funds over the past 5 years. Diversification has fallen into the shadows. When making money is effortless who needs a balanced portfolio (to weather the storms that lie ahead). 

tranquility1

Thrugelmir said:

Portfolio diversification (and construction) is hardly anything new. There's much to read up on the topic. With the boom in interest in global equity funds over the past 5 years. Diversification has fallen into the shadows. When making money is effortless who needs a balanced portfolio (to weather the storms that lie ahead). 

That money can be lost just as effortlessly.