A Devastating Year Demonstrates the Need to Diversify Investments for Retirement

The triple whammy of a sinking stock market, a battered bond market, and rising inflation are combining to devastate the finances of retirees and putting off dreams of retirement for many baby boomers. 

Wall Street’s traditional, simplified formula for retirement is to place 60 percent of one’s assets in stocks and 40 percent in bonds. Normally, when the stock market declines bonds rise to offset some of the stock losses. But not this year. At Thanksgiving time, the Nasdaq Composite Index was deep in a bear market, down 28 percent for the year, the Standard and Poor’s  500 Index had dropped 15 percent, and bonds, as measured by the iShares Core U.S. Aggregate Bond Index, which tracks U.S. investment grade bonds, was down 14 percent.

Diversification is key to investment success and 2022 demonstrates that the simple 60/40 stocks-to-bonds ratio is insufficient for spreading risk. Investing a percentage of one’s assets in gold can substantially reduce volatility in retirement portfolios and improve performance.

Over the past 20 years, the compounded annual growth rate of gold is 8.6 percent, second only to U.S. stocks at 9.9 percent, as measured by the Morgan Stanley Capital International (MSCI) Total Return Index. Gold, however, is far less volatile than the stock market. Bonds, meanwhile, have delivered a compounded annual growth rate of just 3 percent over the past two decades, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index.

The beauty of diversification with gold is that historically it has a positive correlation with the stock market during “risk-on” periods and a negative correlation with the stock market when it is in decline.