It’s lunch hour at an elementary school. Several kids meet beside a field while two captains pick teams for a quick soccer game. They pick the hotshot players first, leaving the weaker kids to sweat. Nobody wants to be the last one standing.

If these kids represented an investment portfolio, bonds would be the heavy kid with two left feet. There’s a reason plenty of investors don’t want them on their team. The 10-year yield on U.S. Treasury bonds is about 2.90 percent per year. That’s the highest yield since December 2013. But compared to yesteryear, bonds are still gasping for air. They haven’t had such low yields since 1956.

I still own bonds, and I always will. They might not be sexy, but they steady my portfolio when stocks fall hard. Plenty of investors, however, want something else. They might not like bonds. But they don't have the nerve to invest everything in stocks. They still want some stability when the stock market falls.

Such investors might choose to buy gold instead of bonds. Others will think that’s crazy. After all, gold’s returns can be horrific. If you invested $10,000 in gold in 1980, it would have been worth about $10,000 on August 31, 2007. That’s 27 years of treading water. Neither stocks nor bonds have ever slumped that long.

But gold isn’t just for fools. When coupled with stocks, and rebalanced once a year, gold can help to steady a portfolio during stock market jitters. In other words, gold could fill a bond-like role.

Between January 1972 and March 31, 2018, a portfolio invested 60 percent in U.S. stocks and 40 percent in U.S. bonds would have averaged a compound annual return of 9.45 percent, if it were rebalanced once a year. It would have had 8 losing years, and its standard deviation would have been 9.63. Standard deviation represents volatility. The higher the standard deviation, the closer the portfolio is to a Mexican jumping bean.

If, on the other hand, a portfolio were invested 60 percent in U.S. stocks and 40 percent in gold, it would have had 9 losing years. Its standard deviation would have been 12.66.

What’s more, over the past 46 years, its compound annual return would have been 10.50 percent, if it were annually rebalanced. That beat the return of the U.S. stock market which averaged a compound annual return of 10.33 percent over the same time period.

But that doesn’t mean we’ve found the Holy Grail. If a portfolio of 60 percent stocks and 40 percent gold equaled its 1972-2018 performance over the next 46 years, most investors would lose faith. Here’s why:

Over the five-year period from 1980 until 1984, a balanced portfolio with bonds would have trounced its gold-studded equivalent. The traditional balanced portfolio earned a compound annual return of 13.68 percent. In contrast, a balanced portfolio with gold would have earned a compound annual return of just 4.55 percent.

If that weren’t enough to rattle investors’ faith, the portfolio with bonds trounced its gold-adorned equivalent over the next five years too. Between 1984 and 1988, it averaged a compound annual return of 12.57 percent. That compares to just 8.93 percent for the portfolio with gold.

Over the next five years, the portfolio with bonds gave the gold bugs another beating. Between 1992 and 1996, the balanced portfolio with bonds earned a compound annual return of 11.69 percent. Its equivalent with gold would have earned a compound annual return of 9.36 percent.

If investors hadn’t lost faith by 1996, many would have tossed in the towel over the next five years. Between 1996 and 2000, a balanced portfolio with bonds earned a compound annual return of 12.90 percent. With gold, it would have earned a compound annual return of just 7.69 percent.

This doesn’t mean a portfolio of 60 percent stocks and 40 percent gold is a horrible investment. The long-term numbers have certainly been impressive. But like any other portfolio, it could disappoint for years before it starts to shine.

Gold Instead Of Bonds?
Sample Portfolio*

Allocation Symbol Fund Expense Ratio
40% iShares Core Total U.S. Stock Market ETF ITOT 0.03%
20% iShares Core MSCI Total International Stock ETF IXUS 0.11%
40% iShares Gold Trust IAU 0.25%
Years & Returns 100% U.S. Stocks 60% U.S. Stocks
40% Bonds
60% U.S. Stocks
40% Gold
1972-1976
Average Return 3.7% 5.78% 16.91%
Best Year 37.82% 25.64% 30.07%
Worst Year -27.81% -14.41% 10.13%
100% U.S. Stocks 60% U.S. Stocks
40% Bonds
60% U.S. Stocks
40% Gold
1976-1980
Average Return 17.01% 12.23% 25.11%
Best Year 33.15% 21.38% 67.91%
Worst Year 3.36% -1.6% 7.21%
100% U.S. Stocks 60% U.S. Stocks
40% Bonds
60% U.S. Stocks
40% Gold
1980-1984
Average Return 14.03% 13.68% 4.55%
Best Year 33.15% 24.75% 24.89%
Worst Year -4.15% 1.27% -15.35%
Average Return
100% U.S. Stocks 60% U.S. Stocks
40% Bonds
60% U.S. Stocks
40% Gold
1984-1988
Average Return 13.09% 12.57% 8.93%
Best Year 31.27% 27.66% 21.09%
Worst Year 2.19% 2.19% -6.29%
100% U.S. Stocks 60% U.S. Stocks
40% Bonds
60% U.S. Stocks
40% Gold
1988-1992
Average Return 15.32% 13.55% 6.54%
Best Year 32.39% 25.82% 15.98%
Worst Year -6.08% 0.14% -4.64%
100% U.S. Stocks 60% U.S. Stocks
40% Bonds
60% U.S. Stocks
40% Gold
1992-1996
Average Return 14.63% 11.69% 9.36%
Best Year 35.79% 29.65% 21.91%
Worst Year 0.17% -1.83% -0.94%
Average Return
100% U.S. Stocks 60% U.S. Stocks
40% Bonds
60% U.S. Stocks
40% Gold
1996-2000
Average Return 16.68% 12.90% 7.69%
Best Year 30.99% 22.18% 14.76%
Worst Year -10.57% -0.73% -8.85%
100% U.S. Stocks 60% U.S. Stocks
40% Bonds
60% U.S. Stocks
40% Gold
2000-2005 -0.24% 3.29% 4.26%
Average Return 31.35% 19.76% 27.51%
Best Year -20.96% -6.92% -8.85%
Worst Year
100% U.S. Stocks 60% U.S. Stocks
40% Bonds
60% U.S. Stocks
40% Gold
2005-2009
Average Return 0.91% 3.73% 8.87%
Best Year 28.7% 16.54% 26.83%
Worst Year -37.04% -16.89% -20.25%
100% U.S. Stocks 60% U.S. Stocks
40% Bonds
60% U.S. Stocks
40% Gold
2009-2013
Average Return 18.72% 12.65% 14.55%
Best Year 33.35% 18.77% 26.83%
Worst Year 0.96% 4.49% 4.40%
100% U.S. Stocks 60% U.S. Stocks
40% Bonds
60% U.S. Stocks
40% Gold
2013-2018*
Average Return 14.5% 9.16% 7.38%
Best Year 33.35% 18.77% 17.75%
Worst Year -0.63% -0.90% -4.09%
1972-2018*
Average Return 10.33% 9.45% 10.50%
Best Year 37.82% 29.65% 67.91%
Worst Year -37.04% -16.89% -20.25%
Standard Deviation** 15.37 9.63 12.66

Annual Performance Comparisons
January 1972- March 31, 2018

100% U.S. Stocks 60% U.S. Stocks
40% Bonds
60% U.S. Stocks
40% Gold
1972 17.62% 11.66% 30.07%
1973 -18.18% -9.12% 18.49%
1974 -27.81% -14.41% 10.13%
1975 37.82% 25.64% 12.61%
1976 26.47% 21.38% 14.26%
1977 -3.36% -1.60% 7.21%
1978 8.45% 5.53% 19.30%
1979 24.25% 16.69% 67.91%
1980 33.15% 21.05% 24.89%
1981 -4.15% 1.27% -15.35%
1982 20.50% 24.75% 17.10%
1983 22.66% 15.69% 7.66%
1984 2.19% 7.32% -6.29%
1985 31.27% 27.66% 21.09%
1986 14.57% 14.79% 16.56%
1987 2.61% 2.19% 11.35%
1988 17.32% 12.49% 4.11%
1989 28.12% 22.68% 15.98%
1990 -6.08% 0.14% -4.64%
1991 32.39% 25.82% 15.59%
1992 9.11% 8.58% 3.14%
1993 10.62% 10.95% 13.31%
1994 -0.17% -1.83% -0.94%
1995 35.79% 29.65% 21.91%
1996 20.96% 13.34% 10.80%
1997 30.99% 22.18% 9.90%
1998 23.26% 18.20% 13.72%
1999 23.81% 12.88% 14.76%
2000 -10.57% -0.73% -8.85%
2001 -10.97% -3.56% -6.01%
2002 -20.96% -6.92% -2.99%
2003 31.35% 19.76% 27.51%
2004 12.52% 8.87% 9.50%
2005 5.98% 4.51% 10.69%
2006 15.51% 10.56% 18.33%
2007 5.49% 7.29% 15.48%
2008 -37.04% -16.89% -20.25%
2009 28.70% 16.54% 26.83%
2010 17.09% 13.20% 21.96%
2011 0.96% 4.49% 4.40%
2012 16.25% 10.82% 12.39%
2013 33.35% 18.77% 8.68%
2014 12.43% 9.18% 6.58%
2015 0.29% 0.78% -4.09%
2016 12.53% 8.00% 10.73%
2017 21.05% 13.27% 17.75%
To March 31, 2018 -0.63% -0.90% 0.32%
CAGR CAGR GAGR
10.33% 9.45% 10.50%
Standard Deviation Standard Deviation Standard Deviation
15.37 9.63 12.66

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas