Where Does Gold Fit in Your Portfolio? | Erik Averill, Brandon Averill | AWM Insights #21

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Episode Notes

Gold is a topic that tends to pop up anytime there’s uncertainty in the market or conversations of where the economy is headed. We’ve seen gold hit all-time highs over the past week joined with increased nervousness of the pending stimulus package in congress and upcoming elections. This has resulted in more voices who recommend investing in gold as a safe alternative to a volatile market.

In this episode Brandon and Erik discuss some of the arguments made for investing in gold and potential alternatives for long term investors. Topics discussed include:

  • How should we think about gold?

  • Where/how does gold fit in an investment plan?

  • How to think about investments

  • Why we don’t include gold in our investment portfolios

  • How has gold performed historically as an asset class?

  • Should I purchase physical gold in case things go bad?

  • Is gold a safe hedge against a volatile market?

  • What’s a better way to provide some protection if you’re worried about the economy over the short term?

+ Read the Transcript

Erik Averill (00:00):
Hey everyone. Welcome back to another episode of AWM Insights, where we are talking all things investing, ultimately with the goal to help you capture your highest expected returns.

Erik Averill (00:11):
Brandon, this week in the news we've heard a lot about gold. Gold is something that tends to pop up around any time there's some uncertainty in the market or conversations of where the economy is headed. We've seen gold reach all-time highs this week. I think there's also a lot of just nervousness around the new stimulus package conversation going on in Congress.

Erik Averill (00:35):
So where I thought we would spend a few minutes today is just helping our investors and our listeners think through where does gold fit in somebody's financial plan, in their investment plan. I just want to start with that question. Brandon, how should we think about gold?

Brandon Averil (00:51):
That's a great, great question Erik. I mean you're hitting on a very hot button issue. You've got people who absolutely love gold and then you've got other people that have a really difficult time understanding gold as an investment, and I think that's where we sit.

Brandon Averil (01:07):
When you think back and we look at investing, if we break it down to a fundamental level what we're doing is we're looking at owning assets that are going to pay us back. They're either going to pay us back in cash flow or appreciation, and there's a calculation there that determines what we're willing to pay for that outset.

Brandon Averil (01:29):
A lot of very famous investors adhere to this philosophy. Most of us have heard of Warren Buffett. Warren Buffett talks a lot about this valuing the cash flows. In our opinion the problem with gold is is that it doesn't provide any in that income, so the value of gold is really what you think that someone else is going to pay for it later than what you're buying it for today.

Brandon Averil (01:50):
So it's actually pretty straightforward that there's speculative element to it. So when we go back and look at history, all the way back to the great depression, we see that gold quite frankly as an asset class has underperformed everything really except for cash, if you want to call cash an asset class.

Brandon Averil (02:09):
As a long term investment it's just not something that we really see in our portfolios. But, as you've seen in the news, there are a lot of smart people that believe in gold and believe it can be a hedge, but it doesn't really fit within an investment plan for us.

Erik Averill (02:22):
What I hear you talking about are a few competing objectives that you mentioned multiple times, like long term goals, long term objectives, that ultimately we're trying to capture market returns for that risk that we're taking, and it makes a lot of sense that if it doesn't produce cash flow realistically a lot of its valuation is being driven by investor sentiment.

Erik Averill (02:46):
But it's the hedge, it's the protection part of gold that I think a lot of investors cling to. What's a better way to add some protection in your investment plan if you are nervous of what's going to go on in the economy in the short term? Obviously we don't think you can predict markets, so it shouldn't really drive how you're invested long term, but in the short term what's a better plan than holding gold?

Brandon Averil (03:12):
From the short term I think we beat this drum pretty hard, but it's having a plan where you've set aside a couple years of living expenses and you're keeping that in cash, which I just acknowledged has underperformed gold over the long term, however we're talking a very short term period here, so totally different priorities. You could always take that short term money and invest it in US Treasury Bonds, which have outperformed gold over time.

Brandon Averil (03:38):
But when we turn to that long term portfolio, you've set aside kind of the first couple of years of living expenses to give you confidence in your long term allocations. We protect the portfolio here against what we call volatilities, the uncomfortableness of your portfolio going up and down, by allocating to bonds. We've acknowledged that those are better performing assets over time and they protect you in the same way during times like this of volatility.

Brandon Averil (04:07):
The additional part of this is if you included gold, I think something that a lot of people miss are you're getting a ton of volatility, way more than you would get from the bond market. You're not getting paid for that volatility from a risk perspective, and then you start to look at from a tax perspective and it's actually one of the highest taxed assets. So if you're a taxable investor, having gold in your portfolio can be kind of an unintended consequence if you're not careful from a tax standpoint.

Brandon Averil (04:33):
Just to wrap it up, by having that plan, a couple years of living expenses, and then use bonds within your long term portfolio for what they are, and that's the ballast, make sure that you have good, conservative, high quality bonds in your portfolio.

Erik Averill (04:46):
Yeah. That makes a lot of sense. Obviously having that two to three years of protection not only locks in some certainty for your living expenses and being able to actually purchase and do things, but it also gives you the patience to be able to be a long term investor.

Erik Averill (05:04):
One of the caveats that you'll hear from people who are big gold bugs is you had mentioned putting your money into US Treasury. Well, while it is backed by the full faith of the United States Government, there are some individuals that are concerned about the viability of the United States economy long term.

Erik Averill (05:22):
Can you talk about physical gold, where investors sometimes see holding on to physical gold, you'll hear this conversation, should I buy some? Should I put it in my vault? What happens if things go bad? Could you shed some light on that for us?

Brandon Averil (05:36):
Yeah. Definitely. I want to reiterate there are a lot of very smart people that believe in gold, and I think you hit kind of their main argument. Their strongest argument in my opinion is the economic system is a house of cards or potentially been fraudulent or it's manipulated. They look at the money printing that the Federal Reserve has done more recently, the amount of debt that we have on our country.

Brandon Averil (06:01):
Those are at all time highs and they're somewhat concerning. However, if you looked across the world, most developed countries have a lot of debt. So the argument that people are making is that I have this store of gold, especially physical gold, and if the economic system here in the US does collapse I've got a stored value that goes back thousands of years, golds been used as a stored value.

Brandon Averil (06:25):
For us, I think that's difficult. You start to think about if you're storing a bunch of gold the cost to store that gold. Are you going to take out your knife, heat it up and shave off a sliver for your Big Mac? For us that's a hard argument. But, hey, there is an argument there. It is a strong argument. It just doesn't fit in our opinion within our clients' portfolios.

Erik Averill (06:46):
That's helpful. I think it goes back to everybody has their own personal viewpoint on where they think the economy is going and also the amount of risk that they're willing to take for their family and for themselves. This is the importance of sitting down and having a customized plan and having an intimate conversation with a certified private wealth advisor.

Erik Averill (07:08):
All money is not treated equal, so it's why sitting down and saying what do you need to have some more certainty to help you sleep at night, and then once we put that aside, now we can focus on capturing your highest expected returns by first making sure that we're capturing all of the market returns that we deserve without overpaying for them, with minimizing taxes.

Erik Averill (07:30):
Then if you're ultimately trying to maximize your returns, we know that we've hounded that in previous episodes on the private markets. So we appreciate your guys' attention as always. If you guys want to access the show notes, if you guys want to check out previous episodes you can head over to awminsights.com.

Erik Averill (07:50):
We'd love to hear from you, whether it's specifically about gold or another topic. We're always here for you. Until next time, stay humble, stay hungry and always be a pro.

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