Recently, a man in his seventies sought my advice when he noticed that his tolerance for market volatility had become very low. He told me that he had always taken risks and accepted the volatility of the markets, an inevitable compromise for those aiming for long-term investment. Now that he is 71 years old, he was considering selling his portfolio to take refuge in purchasing physical gold.
It is true that gold is a safe haven and that it is an asset that is not correlated to stock markets. It is therefore possible to mitigate potential losses when they take a nosedive. However, this does not mean that gold is free from all volatility. While investing in gold represents potential long-term gain, this investment does not generate any income, something that is usually required in retirement. That said, the heart of my reluctance finds its origin in another, even more fundamental element. Wanting to bet everything on gold essentially goes against a very simple principle in portfolio management, that of diversification.
Never bet everything on a specific asset or security
At the turn of the 2000s, techno titles were popular. Over the past 20 years, there has also been a craze for Canadian cannabis companies, pharmaceuticals – especially during the pandemic and when there was an immense need for vaccines – and, of course, cryptocurrency. It is true that it may seem enticing to “bet big” on stocks or companies that are skyrocketing or that seem to show good growth potential.
For the majority of budding investors, however, these kinds of predictions rarely work. This seems much more like speculation than investment. First, if you hear someone around you bragging about their best move, it may already be too late to jump on the bandwagon. Perhaps you will then buy at too high a price, driven by popular enthusiasm which will not serve you. Even by buying very early, if you concentrate your investments in a single security or even in a few securities, you will inevitably increase your risks of suffering significant losses.
It is important to remember that not all sectors of activity, all geographic regions or all securities listed on the stock exchange will react in the same way at different stages of the same stock market cycle. For example, the technology sector had a disastrous year in 2022, while 2021 and 2023 were excellent. Renewable energies had a good year in 2020, only to show losses from 2021 to 2023. Good diversification of a portfolio often also requires varying other elements, such as the capitalization size of companies between small, medium and large. capitalization. If you use funds, the complementarity of management styles between value and growth is a valuable asset in your portfolio.
Other types of investment
Purchasing pure gold requires significant storage and insurance costs. Instead, you can consider more accessible options like adding precious metals exchange-traded funds (ETFs) or gold stocks to a portion of your portfolio. Furthermore, if your portfolio already has good traditional diversification, it is possible to consider additional strategies. These are essentially forms of investment which are distinguished from the traditional diversification between the two main categories of traditional assets which are stocks and bonds. These include: private loans, infrastructure, absolute return funds, leverage, short positions.
By being very little linked to stock markets, these investments generally reduce the risk of your portfolio. Others, on the contrary, require a high risk tolerance. For example, you could add a fund that focuses on short positions rather than just the long positions typically held in your portfolio. Formerly reserved for institutional investors, these types of investments are increasingly accessible to individuals through brokerage and offered in ETF or mutual fund structures. You must understand, however, that these investments, by reducing the volatility of your portfolio, sometimes mean having to leave growth gains on the table when the markets are strongly rising.
Finally, in the case of our retiree who has become more fearful with age, obviously it will be imperative for him to review his investment policy, to revise downwards his risk tolerance and above all to secure his assets to be disbursed at short term. Even if Mr. considers that he no longer wants to take risks, he can consider certain solutions with a guaranteed lifetime income (segregated funds or annuities) for a portion of his portfolio. Obviously, if his fortune is greater, the purchase of physical gold bars or the use of commodity ETFs and so-called alternative investments could be integrated for a reasonable percentage of his portfolio.