Glitter Your Portfolio With Gold

Experience is the best teacher and it is bad experience that teaches you some of the best lessons. In that respect, many investors are now staring at large drawdowns in their portfolio. A portfolio consisting of only frontline equity is on an average down by 25 per cent from the start of the year while the others are down by one-third. While investing, protecting your losses is equally important as generating returns. One of the best ways for investors to stay protected from unexpectedly large losses is through proper asset allocation and periodical rebalancing.

A combination of three asset classes would have helped you to contain losses in your portfolio. For example, a 60 per cent weightage to equity, 30 per cent weightage to debt and 10 per cent weightage to gold would have reduced your portfolio losses by almost 12 per cent. That means instead of 25 per cent your portfolio would have lost only 13 per cent. Gold, which has appreciated by more than 20 per cent since the start of the year would have helped you to protect your losses. The beauty of gold as an asset class is that it is negatively correlated with equity.

This negative correlation gets accentuated as the equity market moves into greater negative territory. Before the current sharp rise in gold, we experienced such movement in gold prices during the great financial crisis of 2008 when the equity market suffered huge losses. These experiences teach us a great lesson about asset allocation and the importance of gold in our portfolio. As such, our cover story this time dives deep to gain insights about the importance of gold in a portfolio and what should be an ideal allocation to gold along with laying out the best route to invest in this metal.

SHASHIKANT