Market participants have many asset classes to choose from, vying for their attention. Advocates of asset allocation argue that investors should spread their money out across investments such as stocks, bonds, precious metals, and real estate. But I am not a believer in asset allocation. I believe it is a recipe for mediocrity. You don't want to put every spice on the spice rack into your goulash. It just won't taste good.
This was one of the key motivations behind the asset class ranking system in my Best Stocks Now app, to help investors allocate to the right asset classes at the right time. There are 60 asset classes identified in my app that are ranked daily.
Last year, if you had a large allocation to small cap U.S. stocks your performance was stellar. That was the asset class worth owning last year. Gold on the other hand was down 27% and the bond market was down 9% last year. The purpose of the app is to keep you in the right asset classes at the right time.
So what about this year? This year, one of the best places to be in the market is the Energy sector, in holdings like MLPs and Oil & Gas stocks. And this year, certain foreign markets have done well, such as Canada and Emerging Markets like Latin America and India. Emerging Markets in particular, were a place to avoid last year.
Being in the right asset classes at the right time is critical to achieving investment success. That being said, Iraq is back in the headlines. The President has announced that we are sending in some "advisors". When I think of advisors, I think of guys wearing suits and carrying briefcases, but these advisors are probably well armed. The situation in Iraq appears to be escalating.
Typically in times of crisis, investors pile into gold. This past week, rising on the Iraq news, gold was up $22 an ounce.
If I was a believer in asset allocation I would advocate always having some gold in your portfolio. It is indeed a hedge against inflation, like rising food and energy prices, and a way to protect yourself from a falling dollar.
But is it time to buy gold now? When I look at the last 5 years, inflation is not really a problem with CPI stable at around 2% and the US dollar is not collapsing.
Let's look at the facts and not the hype. Comparing the price performance of gold relative to the S&P 500 over the last 5 years, the S&P 500 was up more than 113% on a cumulative basis versus only 38% for gold.
The reality is that over the last 5 years, gold (NYSEARCA:GLD) has significantly underperformed the U.S. stock market, up only 6.7% per year versus a 16.3% return for the S&P 500 Index. Over the last 3 years, gold has actually been down 5.4% on an annualized basis versus a positive return of 15.5% for the S&P 500.
Data from Best Stocks Now app
My Best Stocks Now app has kept me out of gold the last several years and it is still one of the worst ranked asset classes in my rankings. The SPDR Gold shares currently ranks 3077 out of 3800+ stocks in the Best Stocks Now universe.
Data from Best Stocks Now app
So for now, regardless of the recent Iraq-related spike in gold prices, I remain a bull on the stock market and a bear on gold.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.