“Am I diversified?”
It’s a question every investor should ask. It’s a question that CNBC’s bombastic stock guru Jim Cramer encourages his followers to pose. Unfortunately, Cramer’s answers are one-dimensional – he looks at diversification only in terms of stock holdings.
Having a stock portfolio that is diversified among different sectors and styles is just one aspect of diversification. During a stock market crash, any broadly diversified stock portfolio can be expected to go down with the market.
Only a gambler would be positioned 100% in stocks. And at today’s dangerously lofty valuations, which are back near 2007 and 2000 levels by some metrics, going all-in on stocks would be a gamble with elevated risk.
Nearly all financial advisors recommend allocations to bonds and cash to avoid overexposure to equities. Modern Portfolio Theory tells them that the greater the allocation to bonds and cash, the less risk. That’s mostly held true over the past 30 years, because interest rates have been on the decline. Falling rates mean a rising bond market. That’s the only paradigm with which most financial advisors today are familiar.
What happens when inflation starts taking off? What happens when rates start rising from today’s historically low levels and bond values trend down for months, then years? In a rising rates environment, all dollar-denominated financial assets could be at risk – stocks, bonds, whole life insurance, fixed annuities, etc.
That’s where precious metals come in.
Gold and silver are uncorrelated to conventional financial assets. The metals can gain (or at least retain) value during times when other asset classes are in bear markets. In fact, gold prices tend to move inversely to investor confidence. During the late 1970s stagflation, the 2000-2002 tech wreck, and the 2008 financial crisis, gold performed far better than portfolios containing only conventional financial assets.
