A reader asks, “Can I add 10% to 20% gold to my investment portfolio? My need is in 15 years? Is it possible to do backtest to find out how a portfolio with gold fares against a portfolio without gold?
The short answer to this question is one can certainly add 10% to 20% of gold to a long-term investment portfolio. However, there are some caveats to be kept in mind. This article will present backtest results, but the backtest itself has an issue.
Gold returns in the past are dominated by the USD-INR exchange rate. In particular, the exchange rate zoomed up when the economy opened up in the nineties. Gold INR returns recently have been in step with Gold USD because our currency is more stable now.
This can be seen in the rolling return chart below. So a backtest that shows a with-gold portfolio outperforming should not be taken too seriously as a repetition is unlikely – unless the country is in serious trouble.
For more charts and perspectives, see Gold Price Movement: USD vs INR.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Now, we can run a backtest comparing two portfolios:
- 60% Equity (Sensex TRI) and 40% (long-term) gilts (IBEX I-Sec index)
- 60% Equity, 10% or 20% of gold INR and the rest gilts.
The simulation is from Sep 1996 to Aug 2022; 132 15-year runs are possible. We shall assume both portfolios are rebalanced annually. The XIRRs for each run for both portfolios are shown before.The start date of each run is shown in the X-axis.
The return difference for each run is shown below; 75 out of 132 runs have a return difference of more than 1%. That is, 75 out of 132 runs, the with-gold portfolio had a return 1% higher than the without-gold portfolio.
The volatilities of both portfolios and the beta with respect to each other are plotted below.
Impression:
- The with-gold portfolio has typically outperformed the without-gold portfolio.
- However, the margin of outperformance is significant (> 1%) only for about 56% of the runs.
- There is not much difference in the volatilities of both portfolios as measured by the standard deviation. This is also seen in the relative beta.
- The with-gold portfolio has not always outperformed; more importantly, it has not outperformed for the last 17 years! This is most likely due to the stability of the INR, as mentioned above (many believe our currency is a lot weaker than it actually is!)
- Interestingly, there is not much difference between holding 10% gold and 20% gold. Only in 42 out of 132 runs did the 20% holding outperform by more than 10%.
Is it worth investing in 10-20% of gold for a long-term portfolio?
- There is no harm in doing so, but one must not do it under the assumption that they are sure to do better than a without-gold portfolio.
- An equity+ gilt portfolio has often done just as well without higher volatility.
- The annual rebalancing will require more effort in the with-gold portfolio. Although it may not need to lead to higher tax, it is certainly a higher effort. Most investors fear to rebalance, fearing the process and tax with just equity and debt. Three asset classes will only make it harder for most.
- Gold INR is significantly more correlated with gold USD now, and the past high returns of gold are unlikely to be seen again.
- If equity is an asset class driven by optimism, gold is often driven by pessimism and fear. During extended bull markets, gold can go through years of poor returns. So it would be frustrating to hold it.
- Gold does not always offer a reward commensurate with its risk. See: Gold vs Equity (Sensex) 40-year return and risk comparison.
Taking all this into consideration, our recommendation is to avoid gold for long-term goals. There is, however, one proviso. The above results are valid with long-term gilts. If one were to use 1-year gilts (as a proxy for liquid funds or money market funds), then gold’s outperformance (> 1% return difference) becomes significantly more frequent (105 out of 132 times). In our opinion, this should not be interpreted as the suitability of gold with short-term debt. Rather, it suggests that long-term debt (due to its volatility) is better than short-term debt for long-term goals.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)