So It Turned Out 80% In Precious Metals Was A Bad Idea
By: Roger Nusbaum, AdvisorShares ETF Strategist
Seeking Alpha sent a notification of a new comment left on an article from three years ago. It was written by an anonymous blogger (I think he’s anonymous, on his SA profile page there is no name but there is on his blog that links from his SA profile).
The title was A Simple Retirement Portfolio for the Next 3 Years. The title itself was odd because the purpose of a retirement portfolio for a handful of years is not clear. The simple portfolio (remember this is 2011) provided a nice look in the rear view mirror at how well precious metals had done; the author suggested 80%, yes 80%, in various precious metals ETFs, 5% in an MLP and 15% in large cap food stocks. He got to 80% because 60% had done so well from 2008-2011 (read the article and that point will make more sense).
The author, in looking back on this portfolio noted how well it had done (unambiguously true, it had done very well) and that it had relatively low risk. My comment was that it had done well but not with low risk, in fact the author had no understanding of the risk he was suggesting. It wasn’t that the risk was low, the consequence for taking the risk was low however as precious metals did very well in the period covered.
The new reader comment triggering the email and my revisiting the article noted that the simple retirement portfolio was down 33% since the article was published while the S&P 500 has gone up 50% (both numbers by the commenter’s accounting). Whether the commenter’s math is correct or not you do know that in the last three years equities are up a lot and precious metals are down a lot.
The point here is not to dwell on some randomly suggested portfolio from a few years ago but to talk about asset allocation and how biases can cloud judgment.
In reading the article it is easy to accept that the author believed that precious metals were low risk. It is a common thing to believe that asset classes or market segments are safer than they actually are. It is probably well known now that bonds carry various types of risk but in years past there was far less understanding of those risks than there is now
From the start of the original Random Roger blog I have been consistent in saying that most of a diversified portfolio should be simple equities and fixed income with just a small slice to diversifiers like gold and alternative strategies. While these are not appropriate for every investor a small allocation to these things has helped with things like correlation and volatility. Granted these things are less important when the stock market goes up 30% in one year but they should matter again assuming stock market cycles have not been repealed.
Of course not everyone cares about managing things like correlation and volatility and if you don’t then you probably shouldn’t use diversifiers but there will come a time where this whole conversation circles back to putting large percentages into things like gold, MLPs, one of the Hussman funds and on and on and they will be talking about the same type of risk as the Seeking Alpha article from2011 that thought 80% in precious metals was a good idea.