SURGING demand created a gold rush last year as investors sought a safe haven and an alternative to equities – yet many of those who dived in are now nursing hefty losses.
The precious metal has dropped some 25 per cent in the past year, while the FTSE All-Share has given solid growth of almost 19 per cent.
Shares have been the winner over the past three years too, making a total return of 33 per cent compared with just 1.3 per cent for gold, according to figures from analysts Lipper.
The short-term prospects for the precious metal are not rosy, particularly when you consider the growing likelihood of the tapering of quantitative easing (QE) in the United States: gold has lost its shine amid expectations that the Federal Reserve will start to withdraw its monetary stimulus measures in early 2014.
Tapering points to strengthening of the US economy, whereas gold is a panic asset – a supposed “safe haven” that investors flock to amid economic downturns and volatile financial markets.
So does gold still have a place in a balanced portfolio? Investing in gold tends to divide opinion and theory. Many see it as a hedge against inflation. Others are of the opinion that it is a dated asset class that cannot produce reliable returns or any level of income.
Regardless of which side of the fence you sit on, gold has been a success story over the past decade with strong rises in trading volumes and price. Over the past ten years, gold has made 241 per cent while UK shares have returned a more modest 140 per cent.
How can investors capture potential rises in price while guarding against drops in the future? The short answer is diversification: having a spread of assets that will help to iron out price fluctuations in any one asset class.
While such an approach means you would be unlikely to see any huge gain should the price of gold rise sharply again, a diversified portfolio will not suffer the losses that investing in gold alone could bring.
Portfolio diversification is a widely embraced investment strategy that reduces the unpredictability of markets for investors. It mitigates the volatility and potential losses that investing in a narrow range of assets can entail.
Investing in only one asset class – commodities, such as gold, or shares – is too volatile for most investors. On the other hand, sticking to cash will reduce risk but give no prospect for any real growth. In fact, you are likely to lose money in real terms.
With inflation running at 2.7 per cent, a basic-rate taxpayer (paying income tax at 20 per cent) needs to find a cash savings account paying at least 3.38 per cent per year, while a higher-rate taxpayer (at 40 per cent) needs an account paying 4.5 per cent or more.
Of the 853 cash savings accounts on the market today – including tax-free individual savings accounts (Isas) – just eight negate the effects of tax and inflation, according to Moneyfacts.co.uk.
What does a diversified portfolio look like? This very much depends on you – your risk profile, tolerance to loss and objectives. Building a diversified portfolio is essentially about striking a balance between what is an acceptable level of risk for you and the level of returns you expect.
A typical balanced investor might have 60 per cent in equities, 20 per cent in fixed interest, 12 per cent in property, 5 per cent in alternatives (such as gold) and 3 per cent in cash.
For a more adventurous investor, who has the time to ride out the peaks and troughs of financial markets, this split might look more like this: 80 per cent in equities, 10 per cent in fixed interest, 5 per cent in property, 3 per cent in alternatives and 2 per cent in cash.
Further diversity comes from spreading holdings across different markets and sectors, helping to create a stable portfolio that will gradually increase in value over the longer term. Regular rebalancing will further aid this growth.
Investing in gold still has a future. Rather than invest in gold alone, seek professional help to build a diverse portfolio tailored to you and your circumstances that will stand the test of time, no matter what the prospects of any single asset class.
Evan Duffus is a financial planner at Acumen Financial Planning