Building my personal portfolio part 2: Gold

In part 1 I decided to allocate 70% to Equities and 30% to safe asset to reduce drawdown to 30%

  • US Equities have returned approx. 10% per year.
  • Canadian Bonds have returned approx. 4% per year in the past 10 years
  • My main concern in this part is to review different risk provides for assets and check if they suitable investments

To start my decision making process, I went back an analyzed different asset classes, their return, and drawdown information based on the maximum amount of data available to me.

  1. Risk and Return
  • To meet my financial goal I would like to invest in an asset with maximum return and minimum risk
  • Based on this analysis, SP500 is better than Platinum, Gold, or Silver
  • Although Metals did return between 4-5% annually, their drawdown is larger than that of equities. These investments are relatively inefficient for my portfolio.
  • Canada Bonds (Aggregate Index) is a great candidate for a safe investment of my portfolio an my assumptions. With 3.6% drawdown I am able to invest up to 70% of my portfolio in equities since Canada Bonds have not had a significant a drawdown
SP50010.7%-51%33 Years
Platinum4.1%-66%29 Years
Gold4.1%-45%53 Years
Silver4.5%-72%53 Years
Canada Bonds3.9%-4%10 Years
Note: as of February 2021

2. What about Gold/Silver/Platinum diversification benefits?

  • Let’s backtest our portfolios
    • Portfolio 1: 100% US Equity
    • Portfolio 2: 70% US Equity / 30% US Fixed Income
    • Portfolio 3: 70% US Equity / 15% US Fixed Income / 15% Gold
Portfolio Returns: 1987-2021

The chart confirms my drawdown target hypothesis

Observation 1: adding fixed income reduced my drawdown to a manageable 35% of of the portfolio

Observation 2: adding gold in addition to fixed income has not produced a significant benefit for the period selected. This is only true when fixed income was already present.

Replacing Fixed Income and adding Gold

  • let’s test and see if we get any benefit from removing fixed income from our asset allocation and replace it with gold.
  • expected return on fixed income right now is approx. 1% / year. If you look at any portfolio details you will see this information readily available reflected in portfolio Yield to Maturity.
  • Thus although fixed income may provide risk reducing benefits, in 2021 it no longer provides return benefits. Let’s run a few scenarios
    • Portfolio 1: 100% US Stock Market
    • Portfolio 2: 70% US Stock Market / 30% Gold
    • Portfolio 3: 70% US Stock Market / 15% Gold / 15% US Bonds
Portfolio Returns: 1987-2021
Portfolio Returns: 2000-2021

Conclusion 1: Gold has had strong diversification benefits when compared to equities. Adding gold and removing fixed income does reduce portfolio drawdowns significantly (Portfolio 2).

Adding Gold and Fixed Income produces similar results (Portfolio 3)

If we analyze the date by decade for the same three portfolios

Portfolio Returns: 1990-2000
Portfolio Returns: 2000-2010
Portfolio Returns: 2010-2020

Removing Portfolio Diversification

To play with my portfolios, I testing each asset separately to see the effects of portfolio diversification

  • Portfolio 1: 100% US Stocks
  • Portfolio 2: 100% Gold
  • Portfolio 3: 100% Fixed Income
Portfolio Returns: 1987-2021

It is evident that when one invests in only Stocks or Gold, the results are inferior to investing in a well-diversified portfolio.

Individual Portfolio Returns: 1987-2021

Note: It is interesting to see how negative returns in SP500 are often offset but positive returns in Gold (and vice versa).

Note on other assets:

Unfortunately, I don’t have sufficient tools to analyze returns on Platinum and silver, but I hope to return to this analysis in the future

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