MANY ALTERNATIVE investments can be slotted into one of two categories: They are either hard-asset plays, like commodities and real estate, or they are financially engineered to perform unlike conventional stocks and bonds, which is what you get with many hedge funds and hedge-fund-like mutual funds.
Among hard assets, the classic investment is gold, which is widely seen as a hedge against inflation and political turmoil, and viewed as a good diversifier for financial assets like stocks and bonds. Gold soared in the 1970s, collapsed in the 1980s and came roaring back over the decade beginning 2001, eventually peaking at $1,921 per ounce in September 2011. From there, gold suffered a grueling four-year slump, before bouncing back. From $1,060 at year-end 2015, gold climbed to $1,151 at year-end 2016 and $1,305 at year-end 2017. What about 2018? Gold had mixed performance, but finished the year at $1,285, not far below 2017’s level.
As gold soared over the decade through 2011, so too did the assets of SPDR Gold Shares, an exchange-traded fund backed by gold bullion. The fund, which was launched in 2004, became a popular alternative to owning gold itself, because it saved investors the hassles that come with storing, transporting and insuring their holdings of gold coins or bars.
While gold may provide offsetting gains when stocks and bonds are losing value, you may be disappointed with your long-run performance. Over time, price gains on gold should roughly match the inflation rate, which means all you’re doing is preserving the spending power of your money—and maybe not even that if you buy at the wrong time and once you figure in taxes.
As an alternative, some investors focus instead on the stocks of gold-mining companies, which have the potential to outpace inflation over the long run. Gold stocks are more volatile than gold bullion, but this added volatility means they can be a better diversifier for financial assets. Many mutual fund companies offer funds that invest in mining stocks, including American Century Investments and Fidelity Investments. Also check out VanEck Vectors Gold Miners ETF.
Our Humble Opinion: Gold stocks can be a great way to diversify a stock portfolio. But to turn this uncorrelated performance into greater wealth, you need to set a target portfolio percentage for your gold stocks and then regularly rebalance back to your target. All this takes a fair amount of investment courage: Many folks will find themselves unnerved by gold stocks’ volatility—and frozen in place when they ought to be rebalancing.
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Related: Measuring Volatility