The Golden Rule of Investing
18 Pages Posted: 4 Apr 2023 Last revised: 30 May 2023
Date Written: May 23, 2023
While gold is a volatile asset, it is often considered a safe haven that offers protection during bear markets. We study this safe haven hypothesis by analyzing a strategic allocation to gold for a loss averse investor with a 1-year evaluation horizon. A modest allocation to gold indeed helps to reduce downside risk of traditional stock-bond allocations, yet such risk reduction comes at the cost of return. Conversely, low-volatility stocks are more effective in reducing losses without giving up returns. As a result, a stock-bond-gold allocation considerably benefits from embracing low-volatility stocks, and allows for increasing the equity allocation at the expense of bonds. Notably, the effectiveness of this defensive multi-asset portfolio increases with the investment horizon.
Keywords: Strategic asset allocation, gold, defensive equities, low-volatility investing, loss aversion, downside risk
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation