Half and half?

Or all in?

In the last few posts, we’ve been looking at the most basic allocation between gold and stocks I can think of - a 50/50 split. That split did well versus the S&P 500 over the one time period we looked. But, even though they say “you can’t time the market” well, uh, the time period you analyze really does matter…a lot:

So, here is how to read this crazy chart I concocted. On the left hand side, you pick the year to start investing. This is the first trading day of the year. Then, you figure out how many trading days you are invested for on the top. Remember, these are trading days so instead of 365 days to a year it’s about 251-252 (so just be nice and round to 250 with me and please don’t adjust your glasses in academic disgust for my rounding assumption).

For example, if you pick 2013 as your starting year and invested in half gold (IAU) and half stocks (SPY) and held it for one year (250 on the top), your total return relative to 100% in a theoretically costless S&P 500 portfolio would be -26.1% at the end of those 250 trading days. To do another example, pick 2007 and 1000 trading days and your relative outperformance would be +58.1% over that total four year period.

Taking a step back and squinting our eyes to look at the chart holistically, we can see that there are a couple of really bad periods for our 50/50 portfolio and a couple of really good periods. It mostly depends on whether we allocated to gold prior to the financial world collapsing in 2008 or if we did it after.

In other words, did you buy gold at the top of the cycle? If you did, you were going to underperform a pure stock portfolio. Smart people bought gold prior to stuff hitting the fan during the Great Recession while the rest of us ran around in circles screaming in panic as our stock portfolios got Thanos snapped.

Other than those particularly good or bad periods (and at the beginning of 2020), it’s kind of a mixed bag of performance. A few percentage points up or down for a 50/50 portfolio compared to 100% in stocks is actually pretty surprising. Obviously, those percentages matter if we want to beat the S&P 500 but this analysis doesn’t take into account the other side of the equation, which is risk. I’ll check that out in the next post.