A Tale of Two Investors

When looking at investment performance, many investors look not just at their own performance, but also at the performance of other investors. After all, if you’re making 5% annual gains but someone you know is making 10%, you’re going to want to see if you can replicate those gains.

That’s a natural desire that almost everyone has, that of keeping up with the Joneses. And if you can replicate the portfolio performance of someone who has been doing better than you with minimal effort, isn’t it worth trying?

Let’s look at two hypothetical investors and see what kind of returns their investing strategies have made. Maybe you’ll discover something new that can help you improve your portfolio’s performance.

Two Different Strategies

Let’s call our two investors Jack and Jim. They’re both currently in their mid-50s, and got their start investing in the boom market of the 1990s. Each of them took a very aggressive, but relatively mainstream approach to investing, preferring exclusively to invest in stocks so as to maximize their investment returns.

While Jack and Jim were both affected by the burst of the dotcom bubble, their investments recovered, and by 2007 they each had $300,000 in retirement account assets socked away. But this is when their investment strategies begin to diverge.

Jack trusts the performance of stock markets, and believes that stocks will always increase forever in the long run. No matter what transpires in markets, Jack believes that investing in stocks is the best way to gain wealth. He continued to stick to stock markets regardless of the performance of markets.

Jim isn’t quite so sure that stocks are the best way to gain wealth. And he’s become more certain that stocks aren’t always the best way to maintain and protect wealth and investment gains.

The troubles that began in mid-2007 began to worry Jim. He was aware that there was a housing bubble, and once Bear Stearns and other firms began to experience some difficulties, he decided to invest 30% of his retirement savings in gold. It was a bold move at the time, but did it pay off?

Performance of Stocks vs. Gold

For the sake of convenience, we’re just going to look at the performance of the core portfolios of both Jack and Jim. That means ignoring any future investments, payroll contributions, etc. We’re interested in looking just at the performance of the $300,000 that both Jack and Jim had built up by 2007.

We’ll also assume for convenience’s sake that both Jack and Jim are invested in assets that roughly achieve the same performance of the Dow Jones Industrial Average, and that the stock investments of that core $300,000 portfolio remain invested in similar assets.

We’ll start off in October 2007, when stock markets reached their pre-crisis peak. Both Jack and Jim have $300,000 invested in stock markets. But markets began their slow and steady decline during this month.

Jim finally had had enough of worrying about his stock investments, and invested 30% of his portfolio in gold two months after the stock market peak, on December 10, 2007. By this point the Dow Jones had lost about 3% of its value, falling from 14,164.53 points on October 9, 2007 to 13,727.03 points on December 10, 2007. Jim invested 30% of the remaining $290,000 he had in gold, which was at $808.30 an ounce, purchasing just under 108 ounces of the yellow metal.

Stock markets continued to slide as 2008 began, while gold gained. By March 14, 2008, the Dow was at 11,951.09, while the price of gold had risen to $1002.50 per ounce. Jack’s portfolio was now worth $253,000, while Jim’s was worth $285,000. So far the investment in gold was paying off.

Fast forward to mid-September 2008, when Lehman Brothers declared bankruptcy and the whole world thought the financial system was on the verge of collapse. The Dow had fallen another 1,000 points, to 10,917.51 points. Unfortunately, gold had fallen too, to $786.30 per ounce. Jack’s portfolio was now worth $231,000, while Jim’s was worth just under $247,000.

A month later, after the bank bailouts had been passed, stock markets were even lower. The Dow was now at 8,577.91 points, while gold had rebounded slightly to $848.10. Jack’s 100% stock portfolio was now at just under $182,000, while Jim’s 70% stock / 30% gold portfolio was at just under $219,000. Jack had seen losses of nearly 40%, while Jim had seen a total loss of 27%, or 25% since he had made his gold investment. And at this point he was still 20% ahead of Jack.

By the time stock markets bottomed out in March of 2009, the Dow was at 6,547.05 points, while gold had risen to $921.50. Jack’s portfolio was now worth less than $139,000, while Jim’s was worth $196,500, or nearly 42% more.

As we all know, gold went on to skyrocket in price after that, setting an all-time high price over $1,900 in September 2011. By that point stock markets had increased as well from their lows, but the Dow was still only at 11,139.30 points, still over 20% lower than its all-time high in 2007, and just barely above where it had been in September 2008.

By this point Jack’s portfolio was still only worth $236,000, while Jim had not only recovered, but gained money, with a portfolio value of $370,000. You may be thinking that’s all well and good, but what happened next?

After 2011, stocks began to recover while gold began to fall. By the end of 2014, stock markets had gone on to set new records, with the Dow hitting 18,053.71 points on December 26, while gold dropped below $1,200, to $1,195.80 an ounce. You’re probably thinking that Jack’s strategy is beginning to pay off, right? Not so fast. Jack’s portfolio may be worth $382,000 at this point, but Jim’s is nearly $397,000.

Over the next few years both stock markets and gold had their ups and downs, but after President Trump’s election in 2016 stock markets really began to shoot up. 2017 was a year of numerous records, and by January 26, 2018 the Dow had set another record, closing at 26,616.71 points. Gold was at $1,349.30, better than it had been a few years prior, but still well off its 2011 highs. By this point Jack had finally caught up to Jim. Jack’s portfolio was now worth nearly $564,000, while Jim’s was only worth $540,000.

But shortly after this new stock market high, markets began to tank, losing several thousand points. In fact, the past few years have seen stocks go on a roller coaster, dropping as much as 35% and then rebounding to new highs. So how do they compare to gold today?

As of writing, the Dow Jones’ latest close was 27,452.66, while gold closed at $1,897.30. Both of those numbers are well below all-time highs that were reached in the last couple of months. Jack’s stock portfolio would be worth $581,000 today, while Jim’s 70/30 portfolio would be worth nearly $612,000, giving Jim a nearly 5% advantage over Jack.

That’s pretty impressive performance no matter which way you slice it. And if the economy continues to weaken and slide even further into recession, expect stock markets to plummet and gold to rise. That should make Jim’s portfolio even more valuable, providing him with an even greater advantage over Jack.

Numbers Don’t Lie

Many people wouldn’t believe that investing 30% of your portfolio in gold could leave you better off than investing 100% in stock markets, especially not in the middle of a bull market for stocks. But the numbers tell the whole story. If you’re an investor looking to build wealth over the long term, gold can definitely help build your wealth, not to mention protect you against extreme loss in the event of a stock market crash.

And with a gold IRA, you can easily roll over existing retirement assets from a 401(k), TSP, IRA, or similar account into a gold IRA, allowing you to benefit from investing in gold while still retaining the same tax advantages as a conventional IRA account. If you’re interested in protecting your wealth against loss in the short term and maximizing your wealth in the long term, do you want to invest like Jack or invest like Jim? Hopefully the choice is clear.

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