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Portfolio > Portfolio Construction

What if your client is a gold bug? (Part 2)

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James Bond: “Do you expect me to talk?

Goldfinger: “No, Mr. Bond. I expect you to die.”

Last week, we brought you part one in our series on what to do if your client gets bit by the gold bug. This week, we’ve got another installment as we threw the question out to industry experts and leading advisors. Read on to see their responses. Also, if you have further thoughts on advising your clients on the shiny metal, leave a comment below or send me an email at [email protected].

I believe that portfolio diversification is critical and a client’s money should have exposure to a wide range of asset classes. This includes alternative investments such as gold. The definition of diversification has been blurred over the years and many clients have similarly moving assets within their portfolios. So a portfolio of lots of “stuff” feels diversified even though it may not be. The exposure to the alternatives gives this broad based diversification we are all looking for. Hard metals, commodities, MLPs, and real estate, to name a few, react very differently to market conditions than the more traditional assets, therefore providing a type of insurance to a client’s “risk” portfolio. –Jeffery M. Bucher, President, Citizen Advisory Group

Whenever the price of gold gets really high, as it is currently, people will get interested because the media starts to bombard us with ads for buying gold. Ironically, it’s usually for the wrong reasons. The messages are “Gold is at an all-time high,” “Gold is a great inflation hedge,” etc. I remind my clients while having some alternate assetsin their portfolio can be a good thing, there is a good time to add it and there is a bad time, not at the highpoint in the market cycle. 

Another thing I point out is buying gold can be like buying an individual stock or bond; the value can fluctuate greatly and in a very short time span. Owning things like gold bars or coins can be a risky proposition and many clients do not really hear that part of the story. Nor can they afford to lose the money.

If a client insists on having some gold on their portfolio I educate them as to the various ways they can buy an interest in gold but without as much risk. I show them mutual funds that invest in stocks of gold mining companies, commodity index exchange traded funds (ETFs) that trade like gold but with less volatility and, most importantly, complete liquidity.

After I talk with my clients about what the real risk is, where gold is in the current cycle, what it costs to invest in a meaningful position in gold and the alternatives to what they have seen on TV, they usually moderate their expectations. From there we try to make a good investment decision regarding their portfolio allocation, not based on the emotion which usually drives their initial interest in buying gold. –Steven A. Plewes, CLU, ChFC, Principal of Advisors Financial Group in Bethesda, MD.

When a client asks if they should invest in gold I tell them it may not be a bad idea, but they have to understand it is not a place to put all of their investments, perhaps a portion and not more than 10 or 15 percent. Gold does not pay a dividend. I also tell them to keep in mind, not only does it make a difference when they buy but also when they sell. Selling right is just as important as buying right. 

In addition, if you’re going to purchase gold because of fears of a worldwide economic problem, keep the physical gold and store it someplace where you can retrieve. I had a client who bought gold in his IRA and specifically for the thought there was a worldwide economic collapse coming.

He purchased physical gold and it was being stored in another state; he had a warehouse receipt. My questions were, “If the economy collapses, where will you go to get your gold? How will you get to the warehouse? Can you even tell me where this warehouse is? How will you get into the warehouse to get your gold, and then how would you transport it safely to where you want to live?” That never occurred to him and he had no answers. I recommend owning the physical gold and storing it someplace where it is accessible.

The end goal may not be a bad investment but like anything else, there are benefits and downfalls. There are always gold stocks and funds if one wants to simply play the value fluctuations. –William H. Black, CLU, ChFC, with W. H. Black & Co. in Winter Park, Fla.

Having the benefit of being in this business since 1971, I remember the run up in gold prices in the late 70′s and early 80′s. As a result, I pulled together a study, showing the prices of gold going back to 1833. As you will notice, the average price per ounce began to drastically increase just prior to the 1974 oil embargo, and topped out at $612 in 1980. After that, the prices came down and stayed pretty much flat until they began escalating again in 2002. I ask the client the following question: “Are you okay, because it looks like we are at the top of the market, if your investment in gold goes down and stays down for 20 years?” 

That is a point that I make with a client who wants to put a significant amount of their assets into gold.

I also point out that the price of gold is as high as it has ever been. Therefore, it is important to understand that they are going against the adage that you “buy low and sell high.” 

I point out, too, that gold should be considered as “insurance” against the failure of their other assets.  The fact that they are buying high leaves a distinct possibility that they may be selling low, or that the value may go down and stay down as it has in the past. It’s not necessarily bad or good, it’s just how they feel about what position they want gold to take as part of their overall portfolio. This usually leads to a conversation about what they really think about gold and what position they want it to have in their portfolio, rather than having them respond/react to a newspaper article/television program/other news media hype that has occurred with respect to gold as an investment. –Wayne D. Minich, CLU, ChFC, is the founder of Applied Financial Concepts, Inc.

For more from Daniel Williams, see:

What if your client is a gold bug? (Part 1)

What do boomers think about fixed indexed annuities?

Undecided boomers talk about Obama vs. Romney


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