Tuesday, September 04, 2012
How To Bake a Better Investing Cake
How to Bake a Better Investing Cake
Designing an investment portfolio can be accomplished with success if you have the correct ingredients, follow the instructions, and remain disciplined. If you have a “homemade” recipe that’s been proven to work time after time – you are indeed ahead of the curve. Successful investing uses many of the same skills as baking a great cake.
I have never baked a cake from start to finish. I’ve helped people prepare to make a cake, and armed with bowls of sticky stuff and mixing whisks , assisted them with the work. A quick Internet search tells me I need sugar, eggs, milk, flour, etc. plus frosting to finish the job.
But what if I skipped some of the steps and assorted tasks and invited you over to eat the ingredients one or two at a time? Not very appealing, you would think, and you would no doubt decline gracefully. Many investors acting alone proceed within a vacuum or single mindedly design their investment accounts or retirement plans without a proven recipe I can offer a recipe for success that will perform well but also protect you from the .ravages of inflation AND the pain of recessions and stock market crashes.
Let’s focus in my example on just two ingredients in the recipe: gold and stocks. The yellow metal has stolen the spotlight the past 5-10 years, performing quite nicely. Stocks have to be considered as the main staple in our investing diet. We just cannot avoid equities as they have been the major contributor to building retirement wealth for over 100 years. Most advisors just diversify among Stocks, Bonds, and Cash. Their plan has led to disastrous losses in the past. Our recipe requires gold, silver, other natural resources that protect and diversify your savings. Depending on the client we can provide for physical ownership of bullion, funds that hold physical bullion bars, and when warranted mining companies to produce the metals.
Do you believe gold and the stock market are risky places to invest? We answer YES, in isolation. However, when combined with other non-correlated investments, the combination often increases the returns but decreases the risk. Most investors have a sense and memory that gold had a great run in the 1970’s after President Nixon took America off the ‘gold standard’ in 1973. Gold peaked under President Carter at $850/ounce and then languished for many years. So most would agree: gold wasn’t such a great investment for 20+ years. That’s all true. Naturally, if a big part of your investments were in gold over that time, you suffered mightily.
However, mixing in gold into your portfolio of stocks did have a dramatic and positive effect on your overall portfolio performance. We cited the benefits of this in a detailed report to our clients last month. Today we’ll report to you a valuable subset of that report.
Gold has the qualities to act as a hedge in a portfolio to lessen the negative effects that a bad stock market serve to your table. So, just as investing in the yellow metal alone could cause sleepless nights, when mixed with stocks it contributes to the overall portfolio performance and prevents wild ups and downs. What is critical is not how each component of your portfolio performs but what is the PROFIT earned at the end of the year.
A portfolio of half gold and half stocks would have hedged or lessened an all stock portfolios’ losses in 6 of 7 down (bear) markets over the past 40 years. When stocks turned down, gold delivered. Gold helped your portfolio in 1973, 1974, 1977, 1990, the 2000-2002 bear market, and the most recent 2007-2009 ugly bear market when stocks fell 50% in just 17 months! Gold rose $200 an ounce or 30% during that stock meltdown. That’s the diversification or balancing effect. In just two years did Gold fall enough for your total portfolio to decline and not show a profit.. That’s a record and a prize winning recipe that even Betty Crocker would proud of.
In summary; Gold does act as a hedge and lessen the ups and downs of an all-stock portfolio. The proof’s in the pudding recipe, so to speak. The ingredients chosen and the quantity of your holdings in stocks, gold, bonds, and cash can truly make a difference in both providing decent portfolio returns and sleeping well.
For a free consultation and some strategies and ideas on using gold and precious metals in your portfolio's design, give us a call.
Barry L. Unterbrink, CRPC
Posted by Barry Unterbrink at 9/04/2012 04:51:00 PM
Barry Unterbrink is a fee-based Chartered Retirement Planning Counselor and wealth manager. He and his father, Larry Unterbrink, have experience as portfolio managers for institutional pension funds totaling $100 million, Investment Advisory Presidents and financial newsletter publishers. See http://www.stetsonwealthmanagement.com for more information.