As Good As Gold: Smart Investing in Volatile Times

By George Heery, CCIM and Skip Stone, CFA, ChFC

Heery Brothers is delighted to co-author this article with Skip Stone, an experienced financial advisor with Morgan Stanley Smith Barney. In addition to regular financial advisory, Skip has unique capabilities in the super-jumbo real estate lending marketplace.

The price of gold has tripled over the past three years.  Meanwhile, the value of real estate in the US has dropped by about a third.  So, should an investor jump in to buy gold because gold is a hot commodity or should an investor buy real estate since it’s fallen so much?

Gold has appreciated quite drastically since the credit crisis of 2008 (See Below Chart).  However, looking over the last three decades, instead of just the last three years, we find that gold has been a rather docile investment. Stretching out the investment time horizon back to 1981, when the price of gold was about $700 (down from its peak of $850 in 1980), we find that gold (now about $1750 an ounce) has appreciated by about 3.1% a year over the last 30 years.  Coincidentally, the rate of inflation over the last 30 years has also been 3.1% (  Thus, the tripling in the price of gold has allowed gold to catch up with the 30-year rate of inflation.

On the other hand, the median price of a home in June 1981 was $68,800, and in June 2011, the median value of a home was $235,200, equating to a 4.2% appreciation in the median home price (US Census).  That’s about 1% per year more than gold (or inflation).  The below chart of Standard & Poors Case Shiller Housing Price Indices for Atlanta and 20 major metros is of particular interest.

However, it is important to note that real estate is not quite as easy to measure as the price of gold. The median home value across the US cannot possibly accurately reflect the price movements of each local community. Another method of observing real estate price movements is through REITs – publicly traded real estate investment trusts.  According to Morningstar, the average annual return on REITs from 1980 to 2010 was 12.3%. REIT’s not only outperformed gold (3.2%), but also other commodities (7.5%), international stocks (10.1%), and US stocks (11.4%).

Looking at these numbers alone, however, an investor cannot make a prudent decision on what investment is best for his situation, mainly because past performance is no guarantee of future returns. Besides, each of these risky assets tends to perform well at different points along a market cycle.  Real estate had some slow years during the 1980s, but saw big gains through the 1990s and 2000s, up until 2006 where prices reached their peak.  Meanwhile, gold fell in price throughout much of the 1980s until finally hitting bottom in the mid 1990s and then driving toward historic highs over the last few years.  Additionally, stocks experienced a couple of extenuated bull markets throughout much of the 1980s and 1990s, but have had a difficult 12 years.

Better than simply picking one investment over the others, it is often a much more prudent idea to create a portfolio that mixes all of these “risky” assets, along with a portion in stable bonds or fixed income to create a more consistent and less risky total portfolio.  Modern Portfolio Theory tells us that, by combining different asset classes, investors can create portfolios that are more likely to deliver consistent returns over time with less risk than any one asset class would by itself.

Careful diversification not only helps maximize returns but can also minimize the volatility of those returns over time. However, diversification alone cannot assure a profit or eliminate the risk of investment loss, as there is no certainty that a diversified portfolio will achieve a better return than a non-diversified portfolio. The process of portfolio construction is a disciplined, personalized process. In constructing a portfolio, the individual risk and return characteristics of the underlying investments must be considered along with your unique needs, goals and risk considerations.

Standard & Poors Case Shiller Indices for Atlanta and 20 Major Metros

Standard & Poors Case Shiller Indices for Atlanta and 20 Major Metros

Performance by Asset Class

Performance by Asset Class

Leave a Comment