Insurance is a unique product; we buy it hoping we’ll never use it. We carry insurance for our homes, cars and families, but few of us think about insuring our investment portfolios.
The easiest way to protect against a decline in a portfolio’s value is to ensure it is diversified and balanced. To reduce volatility and improve returns, portfolios should contain more than the usual three asset classes.
There are seven asset classes: currency, equities, fixed income, commodities, real estate, precious metals and collectables. Commodities and collectibles aside, if we plot the remaining five over the past 40 years, real estate and gold are numbers one and two.
There several gold investment vehicles available that have different risk/reward relationships. Bullion is the most secure, and the Bank for International Settlements (BIS) has mandated that gold bullion, held on an allocated basis, is a zero-risk asset equal to US dollars and US Treasuries.
Unlike stocks and bonds, precious metals bullion is not anyone’s promise to pay, nor is it dependent on anyone for its value. Gold and silver are also negatively correlated to other financial assets, particularly the US dollar.
When the economy does poorly, the value of precious metals generally rises. As a result, precious metals act as portfolio insurance.
The best way to hedge is by holding physical, segregated and fully allocated bullion—real bars of gold, silver and platinum. This offers a defensive position for investors in difficult market conditions.
Investors should consider rebalancing their portfolios and increasing or adding precious metals. The percentage you should hold depends on a number of factors. For a full discussion, please review Nick’s last article.
Many ancient civilizations recognized the value of precious metals and their ability to hold their purchasing power. Gold has been the ultimate store of wealth for over 3,000 years. While it may seem that North American investors have forgotten this, more and more Canadians are turning to precious metals like gold, silver and platinum to protect their savings and add additional security to their investment portfolios.