Gold. Sale now on.

Gold is like Marmite

Investors either love gold or hate it. They either believe it’s the greatest thing since sliced bread and will be all that is left when society crumbles under global debt. Or believe its a ridiculous thing that is dug up from below the earth, turned into bars, and then stored under massive security, again back below the earth.

I have always been a gold agnostic. I don’t care about where gold goes and what gold does. I don’t like it, I don’t hate it – I simply don’t care about it. But modern portfolio theory states that diversification is the key to balanced investment portfolios. You know the theory, whilst some things zig other things zag. Hold both the zigs and the zags and you take the mid path, which ultimately should give better investment performance and a less fraught journey.

So how did Gold fair recently? UK shares down 12% and Gold down 7%. According to modern portfolio theory that shouldn’t have happened. Gold’s just not zigging whilst shares are zagging anymore. I blame the Chinese. Why not? They are being blamed for everything else.

What have I learned this week?

This week has not taught me much about shares that I didn’t already know. They rise, they fall and hopefully they rise again. Sell offs like this occur regularly. This is the eighteenth stock market correction of my career.

What this week has taught me is that Gold doesn’t belong in our investment portfolios any longer. We’ve held it chiefly as insurance for years and the first time we rely upon it to move independently from shares it lets us down. The Gold has been sold. We learn. We move on.

Modern Portfolio Theory isn’t that modern. It was conceived in 1952. It was based on rational markets and rational investors. China has neither. Now you can see why I blame the Chinese.

Did any other assets do their job?

Our other asset that should move independently from shares is Commercial Property and that has done it’s diversification job very well. Obviously the cash we held across the portfolios did its job too. Both asset classes were immune to the stock market shenanigans.

Interestingly our smaller companies shares have held up much better than I dared imagine. I had sold our UK Income producing shares earlier this year, which I blogged about here. I chose to replace them with one fund that held the entire FTSE All Share market and one fund that just held smaller shares. Call it diversification by size. Rather than make this blog too long, the smaller shares story is the next blog. but to whet your appetite….

Since our trades on 28th April, so just four months ago, this is what has happened to the fund we sold and the fund we replaced it with

WE SOLD- Vanguard UK Equity Income Index Fund -15.28%
WE BOUGHT- iShares MSCI UK Small Cap -2.76%

The net position (15.28 – 2.76 = 12.52%) has saved us from suffering a much greater correction. As I said at the time, everybody was on the same side of the boat.

newest oldest most voted
Notify of
Nigel caddock
Nigel caddock

Insightful and entertaining as ever. I hate marmite and have had enough excitement to last me a lifetime so Howard’s incisive, analytical, measured caution is IMHO genius. But of course thats just my opinion, even more important are his consistently very impressive numbers which tell the real story…QED (I think that’s latin for game, set & match:)