Retirement Planning: Properly Diversify Your Investments

Prudent planning for retirement requires diversifying your investment portfolio. That means divvying savings not only between stocks, bonds, and cash, according to many financial advisors, but also putting a portion into commodities. Some advisors have recommended investing in indexes of commodities futures contracts which include allocations to gold, as well as grains, livestock, foodstuff, energy, and industrial metals. The Bloomberg Commodity Index, for example, is comprised of 14 percent gold. But there’s a problem with this approach.

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Gold has outperformed all broad-based commodity indices, including the Bloomberg Index, and nearly all individual commodities. The price of grains and livestock have been declining for years. Grains account for 22 percent of the Bloomberg Commodity Index and livestock make up 6 percent. Crude oil, which makes up 8 percent of the Index, has lost half of its value in the past six years. The inclusion of these commodities in the index has been a drag on performance.

The fact is gold is a more effective portfolio diversifier than a broad index of commodities. Gold has lower price volatility than other commodities, it is a proven store of value, and it has a highly liquid market, particularly during times of financial market stress.

So, if your financial advisor pushes an investment in an index of commodities it’s time for a serious discussion about the advantages of buying gold instead to diversify your portfolio and reduce exposure to stock and bond market risk. 

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