Each time gold prices start to move up, there is talk about how “gold is a hedge”, “gold is a safe haven”, about how every investor should have a small exposure to it, 5-10%. The question investors should really be asking is, how much gold in my portfolio will protect it against a market crash?
I have maintained several times before that investing in gold is not the same as buying gold and gold in small amounts will not really make a big difference. So let me reiterate this with a specific example: the 2008 market crash.
Also, check out:
- Gold vs Equity (Sensex) 40-year return and risk comparison
- Sovereign gold bonds: What you need to know before buying
- Gold Savings Account: Features, Benefits, How to use and When to use
How Sensex and Gold (INR) reacted to the 2008 (US) housing crisis
On 11th Jan 2008, the Sensex was 20827. It fell to 8325 on 6th March 2009. A 60% fall in 420 days!! During this period, Gold (INR per gram) moved up from Rs. 1235 to Rs. 1707 a 38% gain. Yes, yes that is big, but do not get carried away.
Let us assume an investor has Rs. 100 as the portfolio value in Jan 2008 (same dates as above) with Rs. 40 in fixed income and Rs. 60 in equity. We will assume a non-market linked fixed income as that is pretty common in India (even today and certainly then) with a 7% annual return.
During this period, the Rs. 40 in fixed income would have moved up to Rs. 43 (all numbers rounded off) and the Rs. 60 in equity would have dropped to 24. Thus Rs. 100 became Rs, 67. A fall of nearly 33% (imagine the carnage for some geniuses who want to hold higher exposure in equity because they are young and/or have a high-risk appetite).
The question we shall ask now is: Can I reduce this 33% fall by at least 40% by adding gold. That is, reduce the 33% fall to about 20% by adding gold. This reasonable IMO. So let us check out various possibilities.
- Equity: 60% Fixed Income: 35% Gold 5% Loss: 31% Protection: 1.5%
- This means the portfolio has 60% in equity, 35% in fixed income (debt) and 5% in gold and the loss during the above mentioned 420 day period is 31%. The protection offered by adding gold is 1.5%. That is, compared to a 60% equity: 40% debt portfolio without gold, this portfolio has lowered loss by 1.5%
- Equity: 55% Fixed Income: 40% Gold 5% Loss: 28% Protection: 5%
- Equity: 55% Fixed Income: 35% Gold 10% Loss: 26% Protection: 6%
- Equity: 55% Fixed Income: 35% Gold 10% Loss: 26% Protection: 6%
- Equity: 50% Fixed Income: 40% Gold 10% Loss: 23% Protection: 10%
- Equity: 50% Fixed Income: 35% Gold 15% Loss: 21% Protection: 11%
- Equity: 55% Fixed Income: 30% Gold 15% Loss: 25% Protection: 8%
- Equity: 55% Fixed Income: 25% Gold 20% Loss: 23% Protection: 9%
- Equity: 50% Fixed Income: 30% Gold 20% Loss: 20% Protection: 13%
Option number finally reduced the loss to about 20%. This is about 40% lower than the fall in a portfolio without gold. Even for this 20% exposure to gold is necessary. So that “small exposure” of 5-10% will not pad the wound much.
Now, now, we have just looked at 420 of some of the worst days in stock market history. When the markets do not crash (which is obviously a lot more common), gold is high maintenance.
- It is extremely volatile, much more than stocks!!
- It is highly dependent on INR USD movement: Gold Price Movement: USD vs INR
- Long term returns are comparable to fixed income and it is taxable like a debt fund (if you buy etfs of gold funds). Oh please do not think about Soverighn gold bonds!! They are for buying gold in a risk-free manner at a future date (see video below) and not for investing in gold. Stop confusing investing in gold and buying gold!!
So suppose you decide to hold 20% of gold in your portfolio, it will protect you to some extent when there is a global meltdown and fear in the stock markets but not too much. The price you need to pay for this is: rebalancing from time to time either annually or tactically and associated taxes.
Please do not say, “I will use a multi-asset fund”. It will work only if that is your only fund and you have the courage to pay taxes on it if has a debt fund-like portfolio when you withdraw.
There is no free lunch. It is not just important to choose your poison but also to choose it in the right measure! I would rather have no gold in my portfolio and fill it with safer instruments like fixed deposits. In India, the small savings schemes are the hedge and safe haven!
Videos on Gold Investing
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 700 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 2600 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 what 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 600 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 you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
My 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 for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author
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. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] comAbout freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. 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 from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only 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, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.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 analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, 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 199 (instant download)Free android apps
- All calculators from our book, “You can be Rich Too” are now available on Google Play!
- Install the Financial Freedom App! (Google Play Store)
- Install Freefincal Retirement Planner App! (Google Play Store)
- Find out if you have enough to say "goodbye" to your employer (Google Play Store)