It’s widely accepted in the investment world that stocks and gold seldom move in the same direction. However, that’s exactly what’s been happening lately. They’ve both been on the rise.
Some pundits suggest it’s due to a weakening dollar, while others simply view gold as a safe haven in times of economic uncertainty. One thing is certain: COVID-19 has hit hard in almost every nation on the globe, creating a great deal of uncertainty worldwide. Whatever the reason, gold and stocks moving together is historically unusual.
My suggestion, however, is nothing new. With all that’s currently going on, I think most investors will be best served by diversifying across several asset classes. I get concerned when investors only purchase investments in just one specific category.
For example, a handful of technology stocks have recently been on a tear while the traditional manufacturing stocks have lagged behind. The dot.com bubble and tech wreck of 2001 come to mind. Based on my experiences and interactions with people, I don’t believe many understand the risk associated with investing.
I know a few entrepreneurs who were fearful of stocks and only invested in real estate. On the surface, owning rental property can be a good way to generate a steady income stream. But there are many risks associated with rental income, not the least of which is collecting rent.
A few landlords I know had great difficulty collecting rent and were ultimately burned. And I’ve seen more than a few situations where the legal system was very unsympathetic to landlords when tenants got behind on their payments. And when rent is delinquent, of course, it’s tough for landlords to pay their bills.
Even with a properly diversified portfolio, it’s nearly impossible to have everything doing well at the same time. In a specific diversified account, for example, your domestic stocks may be sailing along even as your international representatives are sinking fast. Or maybe those international stocks are rising fast but your domestic bonds are dragging. And if you are one of those real estate investors having trouble collecting, perhaps tangible assets like gold could help cover the shortfall.
The bottom line is that every investment category carries an element of risk, and diversification can help minimize that it. It’s incumbent on investors to ascertain risk and decide the best way to apportion their own investment portfolios.
Worldwide, the investment arena seems to be getting more complex. It’s not just stocks and bonds anymore. And even stocks and bonds can be broken down into a number of categories. That being said, they’re still the most traditional investment vehicles, and for most investors, make up the core portion of their portfolios.
Where, then, should you diversify beyond the traditional? There are plenty of choices, but you have to be careful. Remember a few years ago when the oil and gas industry was flying high? It didn’t last long.
So. Stocks? Bonds? Hard assets? Real estate? Something else? For most investors, diversification across several categories and asset classes will serve them best over the long term. It doesn’t guarantee success, but over time, proper diversification can help minimize huge peaks and valleys and deliver a smoother, more consistent performance.
And keep in mind; simply standing pat also carries an element of risk.