Reading the Morningstar article, "The Past Decade’s Best Alternative Investments," got me thinking about the past decade of investing in gold.
It’s easy to forget today how powerful the pro-gold message was a decade ago, stoked by a relentless stream of celebrity endorsements of gold products and services. For several years after the Financial Crisis, it felt like SMI was daily bracing against the wind in maintaining the stance that most investors should limit gold to "just" 5-10% of their portfolios.
That argument finally shifted (at least for SMI members) in 2013 when Dynamic Asset Allocation was introduced. DAA gave us a demonstrably better way to invest in gold by being invested in it only when it was trending positively higher. Articles like A Safer Way To Invest In Gold and A Primer on When and Why to Own Gold furthered the argument that relying on DAA to inform our gold investing is wise. (I’d highly recommend that second link to anyone wondering about this — it includes a very helpful chart making this case.)
The numbers clearly show that DAA came along just in time for anyone who had been heavily invested in gold (and there were many of those in the SMI ranks, despite our best efforts to argue for small gold allocations!). In 2013, the year DAA was first published as a live strategy, Gold (GLD) fell a whopping -28.3%. Meanwhile, DAA gained +16.2% in 2013. That’s a nearly 45% swing from Gold to DAA in that single year!
It hasn’t gotten any better for gold owners since then. Over the past five years (2014-2018), GLD has returned just +0.87% annualized. DAA’s returns have also been meager at +3.0% annualized, but obviously that’s better than what would have been earned sitting in gold.
Point of comparison
It’s human nature to move the goalposts a bit and allow our mental comparisons to shift over time. Specifically, after a decade of stocks performing so well with hardly any serious interruptions or scary stretches along the way, it’s tempting to compare the returns of every non-stock investment to what stocks have returned. It’s easy to forget that many investors either were heavily invested in gold a decade ago, or were seriously contemplating it.
It’s understandable why investors who have shifted money from stocks into DAA over the past five years could be disappointed about how that has turned out (though we suspect the feeling regarding DAA will shift dramatically over the next few years). But investors who shifted money from gold into DAA should be doing backflips, especially if they moved that money early in 2013 when DAA was first announced. For those investors, DAA has been a huge benefit relative to what they would have earned otherwise.
If more than 5% of your portfolio is invested in gold, I strongly recommend reading the articles linked to here (see right column) so you’re at least aware of the arguments in favor of taking a more tactical view of your precious metals investing. There are arguments to be made for owning physical gold, but as investors found in the 1980s and 90s, there can also be significant opportunity costs associated.