Category: Risk-free Return

Gold destroys stocks and bonds over past 20 years!

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Why gold should be the foundation of all investment portfolios.

If an investor made a single lump sum investment of $100,000 into the US Stock Market in March 2000 – their portfolio as at 31 March 2020 would be worth approximately $250,000 (1). This result assumes dividends were reinvested and no tax was payable.

Unfortunately for the stock investor, March 2000 was shortly before the Dot-com Crash. This early crash certainly hurt the overall performance of this asset class over a 20 year period, which averaged a mere 4.76% per annum.

A savvy investor might have noted that stock prices were high in 2000 and taken on a more conservative investment strategy by investing $100,000 in US Bonds. Assuming income was reinvested, over the past 20 years they would have turned their $100,000 into $270,000 (2).

This savvy investor took on far less investment risk and achieved a greater return – which in itself is an excellent result!

Or was it?

A third investor, both savvy and Financially Awakened was even more cautious and wanted to take on almost no investment risk whatsoever. This investor therefore invested their $100,000 entirely in gold.

Their March 2020 investment is now worth approximately $580,000 (3). More than twice that of the stock and bond investment portfolios.

The gold investor has achieved an average annual return of 9.24%.

The past 2 decades has been a bonanza for those cautious investors who focused their investment portfolios on gold. So the question remains –

Why doesn’t everyone build gold into their investment portfolios?

Plus a couple of other questions…

Why don’t financial advisers and bankers recommend gold to their clients?

Why doesn’t mainstream media report on the out-performance of gold over other asset classes?

I would love to get your answers and comments.

GOLDSMITH

Charts and data thanks to GOLDHUB and the World Gold Council.
https://www.gold.org/goldhub

Metrics:
1. MSCI USA Net Total Return USD Index 1971+
2. Bloomberg Barclays US Agg Total Return Value Unhedged USD 1976+
3. LBMA Gold Price PM USD 1971+

Notes on results and disclaimers:

  • All results are hypothetical
  • Past performance is not a guarantee of future returns and data and other errors may exist.
  • The entered time period is automatically adjusted based on the available return data for the specified assets
  • CAGR = Compound Annual Growth Rate
  • Stdev = Annualised standard deviation of monthly returns
  • Sharpe and Sortino ratios are calculated and annualised from monthly excess returns over risk free rate (1-month t-bills)
  • Stock market correlation is based on the correlation of monthly returns
  • Drawdowns are calculated based on monthly returns
  • The results use total return and assume that all dividends and distributions are reinvested. Taxes and transaction fees are not included

IMPORTANT: The calculations and any other information generated by this tool are provided by Silicon Cloud Technologies, LLC based on the back-testing functionality of their Portfolio Visualizer software. Note that the resulting performance of various investment outcomes are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. World Gold Council and its affiliates and subsidiaries, provide no warranty or guarantee regarding the functionality of msgid the tool including without limitation any projections, estimates or calculations. For more information on the data used for each asset class, please visit our FAQs

* The investment horizon for the hypothetical analysis starts at the end of the month selected in the “from” date and ends at the end of the month selected in the “to” date. Quarterly, semi-annually and annually rebalancing as well as periodical adjustments, if any, happen on a calendar basis (eg, March, June, September, and December where applicable) regardless of the starting investment period. For more information, please visit our FAQ

Lost Retirement

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Lessons in retirement planning

Witnessing the wild mechanisations of The Great 2020 Coronavirus Stockmarket Crash presents the perfect opportunity to open up a new discussion on the matter of retirement savings. More specifically – superannuation, retirement and pension products and the government regulations which compel us to use them.

For the past 30 years Governments around the world have been ‘encouraging’ their citizens to save for their retirement.  Well ‘encouraging’ may not be a strong enough word. Governments have generally ‘forced’ their citizens to contribute 9-15% of their wages and salaries towards retirement savings products. And over the past 3 weeks, we have seen trillions of dollars wiped off the value of these products. So let’s examine.

Let’s assume the average worker is likely to spend their wages and salary in the following proportions:

  1. Income Tax – 30%
  2. Housing – rent or loan repayments – 25%
  3. Generally living expenses – 25%
  4. Surplus funds available for other investment or luxury spending – 20%

Then the Government came along and said ‘no, we want you workers to put your final 9-15% into special financial products which you cannot touch until you retire’.  The diligent workers are now left with disposable income of a mere 5-11% of their gross pay.

So the workers did as they were told. They allowed for their employers to deduct part of their wages and salaries and send it off to these retirement product providers. Putting their faith in the promises which the politicians, the bankers and their union representatives had made.

Every payday they effective transferred money into these products. Many of which were paying large fees to the product trustees and the investment managers.  This didn’t matter though – for in the end they would have a sizable nest-egg to see them through retirement.

Meanwhile the workers were forced to forego the early repayment of their home loans; the purchase of investment properties; the investment in hard assets; or, simply the enjoyment of life through the purchase of luxury goods and services.

Then along came the GFC. These retirement products lost half their value in 12 months… but this was okay, as there would be time to build it back up.

Now the Coronavirus Crash is upon us, markets are down 35% and so too are the retirement savings products.  Only this time – we are 11 years on from the end of the GFC.  Is there still time to make it back up? 

Interest rates at Nil%, even negative.  Corporate profitability is down and is likely to stay this way for a  number of years. An entire generation has now seen their retirement plans lost. 

So here is a question – why couldn’t the workers simply be trusted to use their additional disposable income to repay their home loans quicker?  

Photo by Kelly Lacy from Pexels

Surely the best way to provide for yourself in retirement is to own your own home outright – yes?

As explained in this previous post https://goldsmith.money/2020/02/23/risk-free-return/ – the early repayment of a home loan generally provides you with a risk-free and tax-free return, equivalent to the going home loan interest rate.

So another question – if those in power genuinely wanted to assist citizens to prepare for retirement – why didn’t they incentivise them to simply purchase a home and repay the debt as fast as they could?

Not enough questions were asked of politicians and bankers post the GFC – will they be allowed to get away with this for a third time?

The importance of the topic cannot be understated. This post will now become a new feature page of the Goldsmith Money website.

I would love to get your thoughts on this topic – please be sure to comment below.

Be well.

GOLDSMITH

Risk-Free Return

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The third foundation block, paramount in your financial awakening is an understanding of the Risk-Free Return. I say paramount, as before you make any investment decision you should know exactly what return you can make, taking zero (or near to zero) investment risk.

Why take on additional risks, when you can reach your destination safely?

When it comes to risk-free returns there are different types, depending on who you are and the country in which your reside. 

In the case of an Australian Citizen, I consider that there are 5 types of risk-free returns… plus… 1 risk-free asset worth an introductory mention.

The first of the risk-free returns is the $US 10 year treasury bond – considered the risk-free investment of choice for bankers and fund managers the world over for 3 generations – currently paying interest of 1.47%pa.

The second, for an Australian, would be an Australian Government Bond – currently paying 0.93%pa.

The third would be a term deposit with a Big 4 Australian Banking institution – currently 1.5%pa

Presently, funds held on account with any Australian financial institution are backed by the Government Guarantee up to $250,000 per entity, per institution.  As such a term deposit with a small Credit Union, has about as much risk of default as an Australian Government Bond. So forth, other term deposits. Currently 1.75%pa.

The fifth risk-free return – is the most important risk-free return of them all. It is generally a tax-free return and its nature is ‘debt reduction’. These ‘debt reduction’ measures might include, assuming no early payout penalties:

  1. Early repayment of a home loan – will currently save you circa 3% pa.
  2. Early repayment of an investment loan – should save you 3-4%pa.
  3. Early repayment of a credit card – save 20% pa.
  4. Holding cash in a 100% loan offset account – save 3-4% pa.

Before you make any investment decision you must at least give consideration to these 5 risk-free return opportunities, as described above and particularly the last. However, please be sure to ask about any early payout penalties on loans and other finance you might been looking to repay.

Over the coming weeks I will provide you with examples on how to apply the risk free-return concept to your financial decision making processes.

Now I mentioned that there was also a single ‘risk-free asset’. Care to take a guess what this might be?

Occasionally it is referred to as a ‘barbaric relic of a bygone era’.

The bankers and the ultra-rich have been telling you it is worthless for 120 years. ‘Just a commodity’ they say. Yet over the past 20 years alone, this risk-free asset has grown in value by approximately 450%. 

In case you haven’t guessed already – this risk-free asset is… GOLD. Yes, GOLD is a ‘risk-free’asset.

It is important to be clear here. GOLD is not risk-free because it provides you with guaranteed income or annual capital growth. Physically held GOLD is risk-free, because it is not a liability of any other party. Meaning there is no risk of default.

Don’t just take my word for it though. On 31 March 2019, GOLD was reclassified as a ‘Tier 1’ asset under the Basel III International Regulatory Accord. Meaning that for the purpose of International Banking Standards, GOLD is now always considered a ‘ZERO risk asset’.

We will be discussing GOLD in much more detail here at the Financial Awakening, over the months and years to come. And with great personal pride and pleasure.

GOLDSMITH

Image by Hermann Schmider from Pixabay