HapiMoney

Over the past few years, the stock market has been tanking. All the while, Gold has been going up and up, seemingly without limit. So why not invest a larger portion of your portfolio in gold?  After all, traditional wisdom says that the stock market and gold are negatively correlated meaning that in times of uncertainty people take their money out of the market and put it into hard assets like gold. Thus, weak returns over the last few years in the stock market means strong returns for gold.

The long and short of it is that investing in Gold makes sense as long as it’s not a large portion of your retirement portfolio (say maybe 5% of your total net worth).

The problem really is that gold exhibits huge amounts of volatility in its returns and you’d either have to be crazy to want such huge portfolio swings be a large portion of your portfolio…after all, you are relying on income from this portfolio to eventually provide for you. A less volatile portfolio would certainly be a bond fund which would provide constant dividend payouts (and improved sanity).

Lastly, gold isn’t a very good long term investment (on its own). Had you invested in 1973 when gold was at it’s lowest and was actively traded, your compounded annual return to 2010 would be 6.84% (pre-tax) at a volatility of about 25% per year.  That same investment in the S&P 500 would yield 9.7% at a lower volatility of about 20%. To put this in more dramatic terms, had you invested $1,000 in either investment, you’d be $20 thousand richer if you had invested in the S&P500.

With gold at record highs, I’d say there are better values to be had in stocks and bonds.