Investment News: How Gold Could Replace Bonds as a Portfolio Diversifier

Article by Jeff Benjamin in Investment News

Instead of trying to navigate the freewheeling price of gold over various market cycles, financial advisers might be better served by focusing on the precious metal's lack of correlation with other investments.

That's the basic premise of a research report showing that a 5% allocation to gold improves the risk-adjusted performance of a standard portfolio of 60% stocks and 40% bonds.

But for optimal risk-adjusted performance, as measured by the Sharpe ratio, the standard 60-40 portfolio should be set at 60% stocks, 5% bonds and 35% gold, according to GraniteShares' research.

"Adding gold to a portfolio improves the Sharpe ratio, and a 35% allocation is optimal," said Will Rhind, founder and chief executive of GraniteShares.

"We're not telling everyone to have 35% gold in their portfolio, we're challenging the groupthink about traditional 60-40 portfolios," he said. "Gold has more value in a portfolio than most people think."

By reweighting the portfolio to 60% stocks, 25% bonds and 15% gold, the annualized return improves to nearly 11.2% with annualized risk of 11%.

increasing that gold allocation to 35% and trimming bonds to 5% over the same 15-year period generates an annualized return of 12.8% with annualized risk of 12.5%.

To read this fascenating article in Investment News in its entirety, click here.