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In the world of investing, diversification is a key concept. Striving for a balance between different asset classes is crucial for managing risk and optimising returns. One particular asset class that is often highlighted for its unique diversifying effect is gold. A recent chart from WisdomTree offers insightful insight into how gold acts as a valuable asset within a well-balanced investment portfolio.
The graph presents an overview of the average annual returns of various Asset classes over the past twenty years, versus their respective downside capture ratios. These ratios serve as measures of the downside risk of an asset class compared to a benchmark index, in this case the MSCI World Index. The vertical axis shows the annual returns, while the horizontal axis indicates the downside capture ratios.
An asset class with a downside capture ratio of less than 100% typically shows a lower downward movement than the MSCI World Index when it falls, while a ratio above 100% indicates a larger downward movement. This analysis reveals an important correlation between downside risk and return: a lower downward movement is often associated with a lower return, and vice versa.
However, amid these patterns, one asset class stands out: gold. Over the past two decades, gold has generated an average annual return of more than 8%, making it one of the best-performing asset classes. Interestingly, gold's downside capture ratio is zero percent, which means that the Gold price impervious to downward movements in the stock market.
The conclusion from this analysis is clear: gold deserves a prominent place in any well-diversified investment portfolio. Its unique features make it a valuable addition, as it provides effective diversification while generating stable returns. By including gold alongside stocks and bonds, investors can benefit from a better risk-reward ratio and robust protection against downward market movements.
Source: Blokland Smart Multi-Asset Fund
Author: Jeroen Blokland
