It’s Past Time to Diversify – Despite the “Expert Take”

Welcome to January, my friends.  This second week of the year is when we stop wishing each other Happy New Year, perhaps because we’re already getting a sense that the year’s not kicking off well.  We also stop telling ourselves everything is sweet and sunny just because we want it to be.

After a body-slam by China, markets aren’t coming back easily.  In fact, on fears the most recent Chinese currency devaluation would hurt manufacturing and nations’ exports to China, crude oil prices plummeted even further, and markets responded appropriately – the S&P 500, the Dow and Nasdaq all took a brutal hit.

What we seem to be getting less of this month, though, are arrogant suggestions about how to trade stocks in troubled times.  Either the know-it-all pundits are realizing they don’t know or they’re simply unwilling to venture a suggestion in waters that are increasingly uncharted.  But that doesn’t mean they’re prepared to take the situation seriously.

What we would ordinarily consider amusing, if it weren’t so alarming, is a January 11 piece in Barron’s with this brazen headline: “The Great Benefit of a Falling Stock Market.”  The essence of their argument seems to be since we can’t figure out what markets are going to do, we should relax and accept the fact that if we invest in them at all, we should also accept the fact we might lose our shirts.

If you think that’s an amazingly lackadaisical attitude for a site hyper-kinetically devoted to assessing, evaluating and quantifying stocks and markets, get a load of this statement from the very same article: “Though Barron’s writes mainly for investors and market professionals who believe in a more active approach to investing, even Barron’s in recent years – with its growing coverage of funds and ETFs – recognizes that a growing share of investors subscribe to a more passive approach to investing.”

It gets better.

One authority often quoted by Barron’s is Bespoke Investment Group (BIG – get it? Paging Dr. Freud…). Yet Barron’s notes, without apparent irony, that in BIG’s “look-ahead piece” for 2016 they’ve summed up their outlook on the stock market thus: “We have no idea.”   Feeling good about the new year yet?  It’s like going in for a surgical consult and having the doctor tell you, “Hey – I’m no expert; let’s just wing it!”

By contrast, the World Gold Council (TWGC) has just published its Investment Commentary: 2015 review and 2016 outlook.   TWGC begins its assessment with this statement:  “Our statistical analysis examines how gold acts as a portfolio diversifier, vehicle for risk management and store of value.”

For fans of actual information, early in the report we see:

“ … While the US dollar is certainly a significant driver for gold, there are two additional important points to consider: (1) it is not the only driver, and (2) it is not always the most relevant metric for most investors….

In our view, there are important conditions that are likely to make 2016 different from 2015:

• Interest rates are not a dominant driver of the gold price once the effect of the dollar is taken into account and we believe that the effect of the dollar on the gold price is overdone

• The gold market in emerging economies continues to expand, highlight the crescent importance that this market will have on price discovery

• Amid expensive stock valuations and high global market risks, gold’s role as a portfolio diversifier and tail risk hedge is particularly relevant.”

This clear, accessible analysis offers several points you can use as a guideline for your own portfolio:  Gold is necessary as “a portfolio diversifier,” “vehicle for risk management” and “store of value.”  As stock valuations continue become increasingly unrealistic, proving in today’s market you get far less than what you pay for, you’ll need to own an asset that maintains its value as more and more stocks lose theirs.

This because I trust you’re not what Barron’s dismissively terms “a passive investor.”

Clearly I agree that physical gold’s the strongest asset you can invest in to defend your wealth. Another critical point made clear in the TWCG report is “[T]he effect of the dollar on the gold price is overdone.” If you doubt this, ask yourself why the central banks of the world, no matter (and perhaps due to) their endless fiat currency shenanigans, just keep loading up on the yellow metal while it’s still affordable.

Don’t do what they say, do what they do.