When to Own Stocks and When to Own Gold
The Journal of Wealth Management Winter 2018, 21 (3) 26-36; DOI/10.3905/jwm.2018.21.3.026
18 Pages Posted: 6 Mar 2020 Last revised: 28 Jan 2022
Date Written: January 13, 2018
We show that dynamic investment portfolio asset allocation based on secular market cycles outperforms a buy-and-hold portfolio of equities and outperforms a buy-and-hold portfolio of gold over long periods. An objective definition of secular market enables identification of an appropriate ex-ante risk-on or risk-off posture for a portfolio. We construct an objective measure which we term a “secular market indicator (SMI)” using a modified Shiller Cyclically Adjusted Price-Earnings (CAPE) ratio with gold as a reference point. This SMI has slightly greater predictive power than Shiller’s CAPE Ratio in that it provides a consistent threshold signal for secular macroeconomic reversals. Finally, we use the SMI to create a simple decision rule to shift asset allocation between equity and gold depending on the secular market cycle. The resulting portfolio outperforms an all-equity portfolio and an all-gold portfolio over holding periods of 10+ years about 70% of the time, and produces superior risk-adjusted performance about 80% of the time.
Keywords: gold, asset allocation, secular market, regime shift, Shiller P/E, CAPE ratio
JEL Classification: E30, G12
Suggested Citation: Suggested Citation