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When two assets in the same portfolio are fundamentally uncorrelated with one another, that’s effective diversification. Uncorrelated assets tend NOT to move in the same direction at the same time, and that’s exactly what you want when you set out to diversify your portfolio.
Unfortunately, many investors believe they are effectively diversified, but they aren’t. They may own foreign stocks as well as U.S. stocks, or they may own a cross-section of stocks from many different industries. Neither example provides effective diversification. Foreign markets have a tendency to move as U.S. markets move. When the stock market is in distress, all industries are usually affected in a similar way.
The only way to achieve true effective diversification – and real portfolio protection – is to own an asset outside the realm of paper assets and mainstream financial markets. Better yet, look for an asset that regularly appreciates precisely when equities are sinking. Here’s one: precious metals.
The chart below reveals gold’s statistically low correlation with key asset classes and markets.
Correlation of Gold with Select Assets and Indices
A correlation of 1.0 indicates perfect correlation between assets.
A correlation of 0.0 indicates that assets are completely uncorrelated.
|CRSP US Total Market Index||CRSP US Small Cap Index||FTSE Emerging Markets All Cap China A Inclusion Index||ICE U.S. Treasury 20+ Year Bond Index||MSCI US Investable Market Real Estate 25/50 Index|
(Data Courtesy of PortfolioVisualizer.com)
In the chart, did you notice that gold’s lowest correlation (.04) is with the entire U.S. stock market? This low correlation between gold and stocks is what so many equities-only portfolios need to achieve real diversification. But there’s more. Gold also enjoys extremely low correlation with long-term bonds and even real estate. In other words, if your portfolio includes those assets, gold still could help you achieve meaningful diversification and “insure” your savings against market risks.
If you are like many U.S. investors, you may be worried about the threats that could compromise your financial goals. Isn’t it good to know there is something you can do to fight back?
If you would like to know more about how gold and silver could help diversify your portfolio, call Augusta and speak with one of our helpful precious metals specialists.