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Today is turning out to be a great day of college football. The Bedlam Game was great and Baylor/TX and Auburn/MO are both competitive as I write this.
The ETF focus column in Barron’s takes a look at gold and what a lousy year it has had. There was a mention to a portfolio manager who recently eliminated a targeted 8% weighting. The way I read it, it seemed like the manager was throwing in the towel.
A few years ago when gold and commodities were hot there was commentary all over the place suggesting 20-25% in some combination of commodities or just gold outright. The permanent portfolio in its purest form allocates 25% to gold.
My take has been the same the entire time which is that gold is a diversifier that offers protection in the face of some sort of external shock but of course the track record for this is not perfect. We have targeted 2-3% and at times it has helped returns and at times like 2013 it has been a drag on returns.
One of the attributes that people assign to gold is that it has a low correlation to equities which is true often enough for me to hold it in that small weighting. To the extent gold does have a low correlation to equities most of the time it should not be a shock when gold goes down or otherwise disappoints in the face of a big equity rally.
This has been a weird year in that asset allocation “hasn’t worked” but gold is not permanently broken and equities are not going to grow to the sky. Over the long term equities are likely to do better than gold but that does not mean gold can’t be an effective asset allocation tool for the duration of a full cycle.
Next is an excerpt from a letter that Josh Brown received and posted on Barry Ritholtz’ web site from someone who works on the institutional side of the business who pulls back the curtain on a lot of things;
Most institutional investors assume, “My job is to outperform the markets or my benchmark and earn a performance bonus.” This is the wrong way to look at a portfolio. Setting a broadly diversified asset allocation, making good decisions, rebalancing to undervalued assets even when it doesn’t feel right, reaching the goals of the organization, reducing fee drag, ensuring liquidity for short-term needs and remembering your time horizon and risk profile should be your job.
Long time readers might recognize the tone from that paragraph in resembling what I’ve been talking about for many years but it can be helpful to hear it come from someone else.
The priority needs to be having enough money when you need it which can be done by not repeating self-destructive behaviors and paying more attention to the things you can control like savings rates and spending habits versus things that cannot be controlled like market returns and when the Fed might taper.
The picture is from Milford Sound.