Optimal Diversification Brings Portfolio Security and Performance

A well-diversified portfolio ideally comprises assets whose returns move in opposite directions. Such assets are called “inversely correlated.” When two assets in the same portfolio are inversely correlated, you have achieved effective diversification—and that should be your goal when you diversify your portfolio.

When you have a retirement account that only has different types of paper assets such as stocks and bonds, you are not diversified in an effective or optimal way. When the market implodes, those assets will drop—and typically they’ll drop at the same time, pulling your entire portfolio down with them. 

You can only achieve true and effective diversification and real portfolio protection if you own a hard asset outside the mainstream financial markets to diversify your paper assets that are inside those markets.

There’s one asset that stands out: gold. As one of the assets that are the least correlated to stocks, the precious metal will safe-guard your portfolio when the stock market tumbles. 

Over the last 20 years, we had a few stock market crashes, and each time the price of gold shot up. This is the way gold can insure your portfolio during market corrections, like the one we are experiencing now. The chart below is a great example of this inverse relationship, which occurred over the past five stock market corrections. In each case, gold proved its value in helping your entire portfolio recover during financial instability. This is how a portfolio is diversified.

Wouldn’t you want to include an asset in your portfolio that has a proven record of countering the risks and threats to your long-term retirement goals? Gold will bring you peace of mind.

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Most Americans haven’t diversified with gold, but it’s not because they haven’t tried. In part 2 of my series, here’s the most common objection Americans hear when they ask their advisor about investing in gold.