Hard Choices

Jonathan Clements

FINANCIAL ASSETS can seem like mere numbers on an account statement, especially at times of stock and bond market turmoil. But hard assets feel more substantial: Your home, artwork and gold coins have a comforting physical presence.

But are they good investments? I’ve been perusing Financial Market History, a collection of essays edited by David Chambers and Elroy Dimson. The paperback costs $38.95 from Amazon, but the Kindle edition is available for free. I was particularly intrigued by the chapter from academic Christophe Spaenjers, which is devoted to the long-run return from durable assets.

According to Spaenjers, between 1900 and 2014, U.S. home prices rose an average 0.3% a year more than inflation, versus 6.5% for stocks and 2% for bonds. This isn’t as grim as it seems, because the housing number includes only capital gains—and thus excludes the rent that a landlord might receive. After costs, that rental income might be worth an additional 5% a year.

Of course, if you occupy your own home, you won’t receive that rental income, because you’re effectively renting to yourself. This imputed rent is still valuable—and likely worth more than the price appreciation that many homeowners obsess over.

Next, Spaenjers focuses on collectibles. Since 1900, art has climbed 2.2% a year more than inflation, stamps 2.9%, wine 4.1% and violins 2.7%. This data is mostly based on U.K. sources.

These figures trail stocks, but they outpace bonds—and are higher than I would have guessed, especially because they don’t reflect the “emotional yield” that collectibles deliver to their owners. Still, Spaenjers notes these figures ignore transaction costs, which can exceed 25% on a roundtrip trade. Also, there would be storage and insurance issues (though these are already reflected in the return for wine).

Finally, Spaenjers turns his attention to high value natural resources, calculating that since 1900 we’ve had a 0.7% annual real return for gold, 0.1% for silver and 0% for diamonds. Those modest returns were coupled with fairly high volatility.

Folks, of course, buy collectibles because they enjoy owning them and purchase homes to live in. But what if you’re buying durable assets to diversify a portfolio that’s invested in stocks and bonds? Almost all durable assets are illiquid, so don’t bank on selling them quickly. Moreover, most of the assets that Spaenjers analyzed were positively correlated with the stock and bond markets, meaning they tended to rise and fall in sync with the financial markets. The exceptions were gold, which is easily traded and has proven to be a great diversifier, and to a much lesser extent silver.

The implication: You might allocate a small piece of your savings to gold if you want to calm down a portfolio that’s largely invested in stocks and bonds. Want to turn that negative correlation into added investment gains? You need to set a target portfolio percentage for gold—maybe 2%—and then regularly rebalance back to that 2% target, so you’re compelled to buy low and sell high.

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