Why Invest In Gold?
New gold investment instruments now make it easier than ever for individual investors to own gold. But you may be asking yourself this question: Why should I own gold?
So let us revisit the rationale behind gold investing and examine into why it is that devoting a small portion of your portfolio to an investment in gold may prove to be a very wise decision indeed!
Individual investors benefit from owning gold for many of the same reasons that nations benefit. Gold is real money!... It is a unique asset class because it is no one else's liability.
Gold has intrinsic value that is less dependant on human enterprise, or the economic and political agendas of nations, than are stocks or bonds or other paper investments.
While the rationale for owning gold is often couched in visions of Armageddon, the practicality of holding gold as a form of insurance is questionable. Just try using Kruggerrands on your next shopping trip.
However, the insurance argument is bolstered by strong empirical evidence. Since gold has very low correlation with other asset classes, it can potentially reduce overall portfolio volatility, without significantly reducing returns.
Between January 1968 and December 2003, gold provided a total annual return of 7.1 percent. During the same period Treasury bills provided exactly the same return. But gold was far riskier; its standard deviation, which measures volatility, was over ten times that of Treasury bills. Thus at first glance, gold does not appear attractive at all. However, upon examining the results of a hypothetical, passively managed portfolio composed of large-cap growth stocks, large-cap value stocks, and small-cap value stocks, in equal amounts, and rebalanced annually for the same 36-year period (1968 to 2003), here's what they found:
The addition of 10 percent gold reduced the total portfolio return by 0.07 percent, but also reduced the standard deviation by 2.31 percent.The addition of 10 percent Treasury bills reduced the total return by 0.49 percent but reduced the standard deviation by only 1.82 percent. Thus, even though gold in absolute terms is far more volatile than Treasury bills, it does have the potential to reduce the magnitude of the swings in your portfolio.
Detractors claim that gold is essentially just another commodity. And indeed, gold itself has no positive expected return. Bonds and stocks on the other hand are capital assets that represent a stake in economic growth. Investors who hold a well-diversified portfolio of stocks or bonds thus can expect to benefit to the extent of general economic growth.
In the final analysis, gold is a viable form of portfolio insurance with a long track record. And for most investors, devoting a small portion of a portfolio to gold-related assets would be a prudent move to make!
* * * * *
So let us revisit the rationale behind gold investing and examine into why it is that devoting a small portion of your portfolio to an investment in gold may prove to be a very wise decision indeed!
Individual investors benefit from owning gold for many of the same reasons that nations benefit. Gold is real money!... It is a unique asset class because it is no one else's liability.
Gold has intrinsic value that is less dependant on human enterprise, or the economic and political agendas of nations, than are stocks or bonds or other paper investments.
While the rationale for owning gold is often couched in visions of Armageddon, the practicality of holding gold as a form of insurance is questionable. Just try using Kruggerrands on your next shopping trip.
However, the insurance argument is bolstered by strong empirical evidence. Since gold has very low correlation with other asset classes, it can potentially reduce overall portfolio volatility, without significantly reducing returns.
Between January 1968 and December 2003, gold provided a total annual return of 7.1 percent. During the same period Treasury bills provided exactly the same return. But gold was far riskier; its standard deviation, which measures volatility, was over ten times that of Treasury bills. Thus at first glance, gold does not appear attractive at all. However, upon examining the results of a hypothetical, passively managed portfolio composed of large-cap growth stocks, large-cap value stocks, and small-cap value stocks, in equal amounts, and rebalanced annually for the same 36-year period (1968 to 2003), here's what they found:
The addition of 10 percent gold reduced the total portfolio return by 0.07 percent, but also reduced the standard deviation by 2.31 percent.The addition of 10 percent Treasury bills reduced the total return by 0.49 percent but reduced the standard deviation by only 1.82 percent. Thus, even though gold in absolute terms is far more volatile than Treasury bills, it does have the potential to reduce the magnitude of the swings in your portfolio.
Detractors claim that gold is essentially just another commodity. And indeed, gold itself has no positive expected return. Bonds and stocks on the other hand are capital assets that represent a stake in economic growth. Investors who hold a well-diversified portfolio of stocks or bonds thus can expect to benefit to the extent of general economic growth.
In the final analysis, gold is a viable form of portfolio insurance with a long track record. And for most investors, devoting a small portion of a portfolio to gold-related assets would be a prudent move to make!
* * * * *
posted by Bob Moser at
11:12 AM
0 Comments:
Post a Comment
<< Home