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% |
| *Portfolio includes an international stock market index for greater diversification. | |||
| 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 |
| *To March 31, 2018 **Measurement of volatility (the lower the number, the lower the volatility) Source: portfoliovisualizer.com | |||
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 | |
| Source: portfoliovisualizer.com | |||
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas