Introduction to Investing
Welcome to Young & Invested, a column where we explore personal finance and investing for Gen Z and Millennials. This column aims to be a resource for young investors navigating the ever-changing financial, political, and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Analyzing Your Portfolio
Many of us fall victim to analyzing our portfolio retrospectively, often considering recent price fluctuations or patterns as a reason to act. This behavior raises questions about the best approach to investing. While reviewing your strategy and resulting portfolio is essential, it’s crucial to be cautious of herd behavior that can occur around assets that are rising in popularity.
The Price Surge of Alternative Assets
The price surge of alternative assets like gold and Bitcoin is a great example of investor-driven price appreciation that can occur amid global political uncertainty. But should you jump aboard the gold train? Before doing so, it’s essential to interrogate the why just as much as the what of investing.
What is Happening to the Gold Price?
Gold is typically a safe-haven commodity during times of political and financial volatility. According to Morningstar analyst Jon Mills, several tailwinds are driving the surging price of gold, including geopolitical tensions, tariff concerns, and the US government’s deteriorating fiscal balance. Central bank purchases also remain elevated, particularly among emerging markets.
The Role of Gold in Your Portfolio
Something that Warren Buffett famously called a “useless” asset continues to hold space in many multi-asset portfolios. Popular Robo-adviser Stockspot has a ~15% allocation to gold across all its portfolio offerings, which is significantly higher than most diversified funds. However, there isn’t a one-size-fits-all answer, and every investor will have a different set of goals and circumstances that drive their strategy and asset allocation.
Why I Don’t Invest in Gold
I hold an all-growth portfolio, meaning 100% is allocated to equities. Despite recent price appreciation, it’s essential to ask yourself why you’re investing in something. Investors have disparate views on diversification, and some think it is simply removing single security risk from a portfolio. Others view diversification as investing in assets that have inverse correlation – or simply put – finding ones that go up in value when others go down.
Diversification and Performance
Gold is often touted as an inflation hedge, with higher interest rates and gold prices theoretically showing negative correlation. However, this relationship is not as straightforward in practice and is likely a combination of other economic variables. Past performance is certainly not the be-all and end-all, nor a reliable indicator of future performance – but it is still worth looking at. According to a chart from VanEck, gold has outperformed other asset classes in the short term, but over the long term, equities came out the winner.
Morningstar Gold Outlook
The gold price has been on a run after rising almost 30% to USD 3,330 per ounce, close to historical highs. Safe-haven buying is likely the main driver, with investors concerned about tariffs and geopolitical uncertainty, as well as the US fiscal deficit. After a forecast update, Morningstar assumes gold averages around USD 3,460 per ounce from 2025 to 2027. However, the midcycle gold price from 2029 is about USD 2,000 per ounce based on estimates of the marginal cost of production.
Conclusions
Asset allocation has long been championed as the primary driver of portfolio performance, with a widely held study suggesting it accounts for almost 94% of returns. The market loves to talk about things that are doing incredibly well with little context of how they may impact your portfolio. Gold is currently close to all-time highs, which means you’re likely to get a lower return than others might have in the past. It’s essential to evaluate this opportunity cost with present elevated prices. There are a number of risks associated with investing in any asset class, and it’s crucial to approach investing with a clear understanding of your goals and risk tolerance.
