11
June
What is Diversification?
It is extremely important that investors do not have all their investment eggs in the one basket. Asset diversification is fundamental to successful long-term investing and an essential part of the wealth management process. This tenet applies to all investors - individual, company and institutional.
Most investors are overly allocated to stock and especially property markets. It has been shown in numerous financial and academic studies that an allocation of some 10% of one’s portfolio to precious metals is a prudent and sensible investment strategy.
Your Financial Advisor should help you determine if your portfolio is properly diversified — as proper diversification is a key step in setting an appropriate strategy. Historical trends of return and risk of various asset classes should be considered. In an increasingly integrated global economy present global geopolitical and macroeconomic conditions must also be considered.
In an increasingly globalised world asset and geographic diversification has become essential. This has led to trends in asset allocation changing radically in recent years, with investment portfolios typically much more diverse both in terms of geographic spread and asset allocation.
The goal of asset allocation is to combine investments with different characteristics so that the risks inherent in any one investment can be balanced by assets that move in different cycles or respond to different market factors. And because leadership tends to rotate from one segment of the market to another, asset allocation can also help you gain exposure to market leaders. You won’t have to guess which asset class is going to do well each year if you already have exposure to many different segments of the market.
Investment success takes time, but more than anything it takes asset allocation—the strategic division of investments among different asset classes, based on current geopolitical and macroeconomic conditions and your personal goals, time horizon and risk tolerance.
Diversification Benefits of Gold
Precious metals remain the ultimate safe-haven assets and gold is the precious metal and universal currency par excellence.
Unlike paper investments such as bonds and equities whose value is dependent on the performance of governments, corporations and the global economy, gold is a hard, tangible, very limited in supply asset whose value is intrinsic to nature.
Macroeconomic, systemic, geopolitical and currency risk look set to remain high for the foreseeable future and in this environment, gold’s safe haven credentials are again coming to the fore and it is important for investors internationally to focus on asset allocation and diversification.
Gold was in a bear market from 1980 to 1999 when it hit $887 per ounce. It bottomed in April '01 at $254 per ounce and has been steadily appreciating ever since. Many commodity and currency analysts believe that gold will surpass its 1980 highs of $887 per ounce (some $2,400 adjusted for inflation) in the coming years as oil and other commodities have already done.
Gold’s value is intrinsic and it is thus one of the few assets that represents no bank, financial institution, multinational corporation or government's liability or ability to repay. Thus owning gold helps eliminate third-party and counter-party financial risk. This is particularly important when there are liquidity crises, credit crunches and global systemic crises.
Gold is the ultimate insurance against economic and financial difficulties. One purchases health insurance for one's family and oneself not in anticipation of severe health problems but simply in case of that eventuality. Similarly one should invest in or save in gold not in anticipation of economic or financial difficulties but simply in case of them. When we buy home insurance or car insurance we are acting out the old proverb of "hoping for the best and preparing for the worst", similarly gold is not the preserve of doom and gloom merchants rather prudent individuals who hope to protect, preserve and grow what wealth they have been fortunate enough to gain through their hard work and or financial acumen.
One does this through diversifying it into the safest asset known to man - gold.
While gold has taken a secondary role to stocks, bonds and property in the last 30 years, an unprecedented era of prosperity for many in the developed world, many astute financial analysts recommend that between 5% and 20% of every investor's portfolio should consist of the ultimate of hard assets - gold.
The price of gold has an inverse correlation to the traditional asset classes over the long term. This gives balance and protection in a world that is changing quickly - environmentally, financially, economically and geopolitically. Over the long run, gold has maintained an excellent track record in maintaining its purchasing power relative to and outperforming other financial assets. It is the only asset that is not someone else’s liability and remains the ultimate safe haven asset.