7 months ago • 2 mins
For a lot of investors, gold is the ultimate safe haven – the first port of call when markets start to get dicey.
It turns out, however, that there may be a better alternative to gold when it comes to risk management, according to analysts at Robeco. It’s low-volatility stocks. The prices of these shares tend to stay relatively stable over time and don’t exhibit the same type of wild swings common in tech companies, for example.
The analysts tested four defensive portfolios models from 1975 to 2022: the 30% stocks and 70% bonds portfolio (black bar); the same 30/70 split adjusted for a 10% gold weighting (gold-ish bar); the 50% low-volatility stocks and 50% bonds portfolio (gray bar); and the same 50/50 split adjusted for a 10% gold weighting (teal bar).
They found that while including a modest allocation (10%) of gold in your 30/70 portfolio can reduce your capital loss risk by 10% (left chart), it doesn’t materially improve your portfolio’s risk-adjusted returns (right chart). That is, the returns you expect from a given amount of risk, which is also measured by the Sortino ratio. The higher the ratio, the better, because you’ll expect higher returns for one unit of risk. Rather, the portfolio with the lowest downside volatility historically, on a one-year horizon, has consisted of 45% bonds, 45% low-volatility stocks, and 10% gold.
The implications are clear. While gold may still have a place in your portfolio, you might also consider increasing your allocation to low-volatility stocks. And as I previously wrote here, low-risk stocks have historically delivered higher returns than high-risk ones, a phenomenon known as the “low-volatility anomaly”.
If low-volatility stocks have piqued your interest, you could consider investing in the iShares MSCI Global Min Vol Factor ETF (ticker: ACWV; expense ratio: 0.32%), iShares MSCI USA Min Vol Factor ETF (USMV; 0.15%), or the iShares MSCI EAFE Min Vol Factor ETF (EFAV; 0.32%).
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
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