Diversification and Portfolio Insurance
Posted By | November 10, 2016
There are so many reasons to hold gold that the mind reels. I want to discuss one of the most important: diversification. If you are new to investing, diversification is just a fancy word for not putting all your eggs in one basket. Let’s start with the difference between owning stocks and mutual funds. If you buy just a few different stocks, your wealth can take a big hit if one of the stocks suddenly tanks. Eggheads call this unsystematic risk, which is the risk associated with a single asset. You can diversify away unsystematic risk by owning a bunch of related assets, such as a mutual fund or exchange-traded fund (ETF), which are baskets of different stocks. It’s simple enough: Because you own so many stocks in your fund, the risk that any one of them will suddenly go belly-up just won’t hurt you all that much.
Mutual funds help you eliminate unsystematic risk for a given asset class, such as stocks, bonds, currencies, etc. That leaves behind systematic risk, which is based on the asset class as a whole. If the stock market plummets, your stock fund will likely also go down – it’s simply the risk of owning stocks. That’s not a very pleasant thought, and it leads investors to seek out other asset classes, another form of diversification we call asset allocation. Usually, this means some investors delve into bond funds. That’s a good start, because very often bond prices rise when stock prices fall.
But the ability to insure your stock portfolio by adding bonds has lost a lot of its effectiveness since 2008. For those who want to dive deep into the topic, see this article in Forbes. Suffice it to say, bonds aren’t a particularly good form of portfolio insurance. But gold has historically been a great way to reduce portfolio risk. Stock risk rises as stock prices climb, and eventually we enter a new bear market in which stocks can fall 20 percent, 50 percent or even more. Gold is not very correlated with stocks, so gold can help offset the risks of holding other assets. Gold also helps you prepare for the risks, however likely or unlikely, of political or economic turmoil. An excellent way to own gold is through an Augusta™ Gold IRA, in which contributions are tax deductible and your wealth grows tax-deferred. Contact us today to get started with your Gold IRA and start diversifying away the risk in your other investments
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