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Posted by on Apr 30, 2014 in ETF Strategist

No, Your Portfolio Should Not Have 20% in Gold and 30% in Cash

By Roger Nusbaum AdvisorShares ETF Strategist

The Millennial Invest Blog had a fun post taking a look at the Death of Money portfolio which comes from a book by the same name written by James Rickards.

Rickards avers for large weightings to things like gold, cash, alternatives (long /short and the like), undeveloped land and a smaller slice to museum quality fine art. Missing from the list are equities and fixed income although very short term debt could be a proxy for cash.

The framing of this portfolio is an expectation of some terrible outcome; deflation, hyperinflation, a return to a gold standard or social upheaval. Rickards apparently believes that the end is nigh for the financial system.

These sorts of alternative portfolios are always fun to look at and consider. As a practical matter the utility here is not betting that the end is indeed nigh, that’s never been a sustainably winning bet, but looking at the asset classes and why some exposure might make sense.

Museum quality art will be beyond the reach of most investors and is also difficult to analyze quantitatively. There is nothing wrong with buying art you enjoy and can afford and if it appreciates in value all the better but expecting it to go up in value as part of a financial plan might be a tall order.

Alternatives, gold and cash are likely a part of most portfolios although I would differ as to how much is suitable for the typical investor. From the start of Random Roger I’ve felt that a mid-single-digit allocation would get the job done and by get the job done I mean offer some downside protection by way of reducing a portfolio’s correlation to the equity market.

Suggestions for 20% allocations to gold sound great and look good when gold is going up and hurt on the way down as was the case in 2013 when the iShares Gold Trust (NYSEARCA: IAU) was down approximately 28%. IAU has a standard deviation of 22.7% versus 12.4% for the iShares Core S&P 500 ETF (NYSEARCA: IVV). While the correlation between the two is low and that can be a benefit to a portfolio, at some subjective level of ownership the volatility introduced by gold into the portfolio starts to increase the overall portfolio’s volatility which is typically the opposite of what is intended.

It is difficult to come up with an argument against some real estate as part of the financial mix and of course we now collectively understand that it can go down in value like anything else but based on Rickards’ reported view, maybe farmland and livestock would be the answer.

While I have maintained that a complete societal breakdown along the lines of the many post-apocalyptic TV shows on now was never a realistic outcome some sort of deflationary outcome is plausible. Swinging the pendulum the other way, inflation that is high enough to be uncomfortable is also plausible (hyperinflation in the US is off the table as we don’t have debt denominated in other currencies) and so understanding other asset classes beyond equities and fixed income is a good idea.

As the stock market goes up most of the time it makes sense for the portfolio to look at least similar (maybe not identical) to the stock market more often than not. Too much exposure to things that are not supposed to look like stocks and the portfolio may not grow sufficiently for clients who need growth.

Source Google Finance,