Is Gold Investment Insurance?

Investment Insurance

My spidey senses light up when I hear someone touting or promoting a conventional investing idea that no longer works. Those are the ones that sound right but are actually wrong.

When I read investment advice and I notice my body getting angry it’s usually because someone is selling a lie (at worst) or selling a very outdated idea (at best). But either way, when bad advice is being sold. I get mad. What do you get?

And so over the past week I’ve received/read a handful of emails and articles about gold being great portfolio insurance.

And if you’ve been in the world of investing for any amount of time, you’re already shaking your head up and down and going, “Yep… heard that one.”

When you drive, you need to have already purchased car insurance because as you know, purchasing it after a car accident doesn’t work.

When you buy a house, you need to have already purchased fire insurance because as you know, purchasing it after the fire doesn’t work.

When you die, you need to have already purchased life insurance because as you know, you can’t buy life insurance once you’re dead.

When you get sick, you need to have already purchased health insurance because as you know in American, you can’t buy health insurance once you’re sick.

Enough already?

One last one because I want you to really get how this “insurance framing” feels like one of those, “everything has insurance so portfolio’s must too” type of feeling.

And lastly when you get old, you need to have already purchased long-term care insurance because as you know, you can’t buy long-term care insurance once you’re old. You can but its amazingly expensive.

It makes sense for investors to believe they need portfolio insurance.

The pick of the month newsletter world has sold billions of dollars of newsletters on the back of this idea of portfolio insurance.

And it’s almost always a cover for selling you a gold product.  

They say, even just 10% in gold… can be the safety-net you need.

But it’s all garbage.

Driving… I get it.

Dieing…  I get it.

Health… I get it.

Getting old… I kind of get it.

But investing?

We’ve been sold to believe that we are going to wake up one morning with stage-four terminal portfolio cancer and half of our account will be gone.

But this has never happened. Ever!

What really happens is an investor misses all the signals that matter. Because they are living in overwhelm-mode. Or their “trusted and liked” big-box advisor is following rules from the 1970’s.

They are missing the stage-one signal, the stage-two signal and the stage-three signal to get out. And it’s avoidable.

And when the investor is taught to ignore the signals, they wake up nine to twelve months AFTER a correction has taken the market down 50%.

The crash already happened.

The fire already burned.

The body already died.

And the patient is already sick.

Portfolio insurance is not what’s needed most…

…Anymore than beaches need insurance from waves. It’s because of the waves that beaches are beaches.

The long term growth of the stock market is second to none because the stock market has price volatility (waves). Not despite it.

Nothing even comes close (Not real estate. Bonds. Currencies. Or commodities) to the longterm growth of the stock market.

AND NO. I’m not saying to just “ride this one out.” That’s stupid advice.

But if you listen to the noise machine you’d think portfolio insurance should be treated like life insurance.

In this article, “How Billionaires Prepared For Bear Markets” you are being told the world’s elite billionaires are kept up at night by a potential 20% stock market correction.

The article starts with a picture of Jeff Bezos with his head peeking out from behind his bedsheets, like he’s four years old worrying about the thunderstorm.

Though I don’t know Jeff. I doubt he’s worrying about a 20% stock market correction. What he’s most worried about (I’m guessing) is whether the US Government is going to find out his little company doesn’t pay taxes. Or maybe those pics he texted to girlfriend Lauren Sanchez. Ooops!

But an ordinary 20% market correction. I don’t think so.

Ray Dalio, David Einhorn, John Paulson, Paul Tudor Jones II and Sam Zell’s names are dragged into this article. Apparently they are elite billionaires too. What does that even mean? Who’s a non-elite billionaire?

The same article goes on to say investors want non-correlated assets in his/her portfolio. What must the writer of this article be presupposing?

The writer must think we are going to wake up one morning with stage-four terminal portfolio cancer.

It’s never happened in the history of the world.

Developed market’s don’t “fall out of bed.”

This article presupposes that stock markets just get cut in half at a whims notices. They don’t. And they never had.

Nine month before Lehman Brothers took the market down to its ultimate 58% dropped there were many signals screaming to get out.

The clouds were dark. The storm was already here. No predicting needed.

Same thing with 2000.

There were nine months of sirens wailing, the clouds are rolling in. The clouds are here. Start stepping out.

But most investors are trained to ignore the signals.

Most are trained to “ride it out” by having a well diversified portfolio. Yes. If you are going to ignore the smoke in the house then yes, you do need a well diversified portfolio to “help protect you when the house burns down.”

Or you could just install a smoke alarm.

Below is a price chart of gold over the past seven years.

By the way, this is not a hit piece on gold. I love gold. And when gold starts trending higher AND is outperforming the stock market then we will certainly want to think about adding gold to our lives.

And as you can see, gold has clearly stopped falling and has most likely put in its low of $1050 in December 2015. So there are many positives that are taking place with gold right now.

But to say, “gold is portfolio insurance,” presupposes you should always have it for “just in case” situations.

You will want to own gold when gold and the S&P 500 tell you to own gold. They are the best two voices to listen to with all things gold.

What will gold be saying to you? Buy me when I’m over $1380 an ounce.

Below is a price of chart of gold over the same seven year period.

But instead of gold being priced in US Dollars which is how most people are use to thinking of gold.

Below is a price chart of the same seven years except the gold chart below is priced in S&P500 units.  And as you can see we need to wait. Because they are still getting a little bit cheaper.

The takeaway…

There is a far better way to protect yourself from the 50% falls in the market. And it’s more about what to listen to than buying insurance.

I take a deep dive by showing you how to do that in this video.

In Your Corner,

RCPeck-Dig Signature.JPG

RC Peck, CFP

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