Should I add a precious metals mining fund to my asset allocation? I am considering the Vanguard Precious Metals Mining Fund (VGPMX), or a similar fund that I would add to my ROTH IRA. Would there be any advantage to doing this?
VGPMX holds
48 stocks and no bonds or commodities. Unless you have reason to think that they will outperform the market indices as a whole over the next 7-9 years, you probably should not hold them. (In fact, you need to think about whether they'll outperform the market on a risk-adjusted basis, since you're going from thousands of stocks to less than 50, all in one sector. My bet is they won't.)
I decided to not get a global bond fund, or junk bond fund, because this would defeat the purpose of bonds in the first place-- to stabilize your portfolio.
While your reasoning makes intuitive sense, holding multiple asset classes to stabilize your portfolio does not work primarily through holding asset classes that are less volatile than your most volatile asset. The stock market as a whole is more volatile than the market for bonds (compare beta or standard deviation of
VTSMX and
VBSMX, for example), so even if this were the case, holding bonds would help.
But the primary reason to hold multiple asset classes is that different asset classes are imperfectly correlated, so big swings in part of your portfolio are accompanied by little changes in other parts. This was established with
modern portfolio theory, though the ghost of smedleyb tells me that in fairness I should mention that MPT has some faultyish assumptions. To view asset class correlations, I like
this table. Take AGG, Barclay's aggregate bond iShares, and VV, Vanguard's big-cap ETF. They've got a -.4 correlation, meaning that they'll counteract each other to some extent. Even if the correlation is a small positive, like the gold commodity as represented by GLD and VV, you'll get a much higher return relative to your volatility and risk by holding a bit of each. This works even if each individual asset is volatile. Does that make sense?
I am not yet a CPA, and not a CFP, and this advice is worth what you paid for it. YMMV...
So, now the last question I have is whether a precious metals mining fund would be a good addition to my portfolio.
I think it looks good. Exposure to several asset classes, reasonable risk, miniscule fees. But I could be missing something.