I hear time and again that a prolong bear market is arriving. Some say it's time to move assets and shares to gold, not to grow your money but simply to preserve when things come crashing.
Is that a common wisdom here?
Thanks! :)
Hi neonlight, welcome to the forums here, and excellent question. Generally around here we view trying to time markets by jumping asset classes as extremely un-wise. While it sounds simple enough to expect a market correction, buy gold to preserve wealth, then buy back into the market at a lower price, the reality is that more people lose money trying to do this kind of market timing than people lose by just riding out market corrections and dollar-cost-averaging into a diversified portfolio. Here is a list of hurdles to overcome to beat the market with this kind of move, and some questions to ask yourself.
- The first problem is you have to be correct about calling the top of the market, and if you look back at years of evidence through threads on this forum, you can see loads of people saying "The top is in!" and being completely wrong. These people have lost boatloads of cash if they were putting their money where their mouth was. Are you ok with missing 10, 20 or 30% gains + years of dividends because you were "a little early" with your guess of where the top of the market was?
- The second problem is it will cost you money to switch asset classes, especially if you are talking about buying gold, it generally comes at a high premium that isn't recouped when sold. Are you ok with losing ~5% of your wealth the moment you switch?
The third problem is that while gold is generally not correlated to the stock market, theres no guarantee that it will hold its value during a market downturn. Most of the gains in gold came AFTER the bottom of the market was long gone during the great recession. Are you prepared to buy back into the bottom of the stock market even if gold is also down?
- The fourth and
BIGGEST problem is that you have to know when to sell your gold and buy back into the markets. This is where the downfall of most market timers occurs. What if you are expecting a 25% drop, and it only drops 22%, then rockets back up to record highs? Then your stuck with gold, the cost of selling it, and have to buy back into the market at little or no discount. It always sounds easy to buy back in at the bottom, but it is by far the hardest thing in reality to get right. Do you know
exactly where the market will bottom out?
So, if all that sounds good, move all your money to gold and see if you can outsmart the market (and keep us updated on how thats going). If that sounds like a lot of stress, risk and guesswork, then do what we generally do around here which is to follow an Investor Policy Statement. Pick an asset allocation for your portfolio that you are comfortable with, as an example 50% US stocks, 20% International stocks, 25% bonds and 5%Gold. You then dollar cost average your money over time into each category keeping the ratio the same NO MATTER WHAT THE MARKETS DO. Over the long term you will be loads richer investing this way.