Gold has a shocking benefit… One that nobody talks about.

Most people aren’t even aware of it.

But after I share it with you today, you will wonder why every remotely intelligent investor DOESN’T own gold (at the right time) – simply to capture this massive benefit.

[ad#Google Adsense 336×280-IA]Let me explain…

The goal of every investor should be to maximize returns and minimize risks.

Many “smart” investors have avoided gold because they don’t see how it meets that goal.

Gold hasn’t always delivered big returns.

Investors know that gold has underperformed the stock market over the long run…

This shouldn’t be a surprise, actually. It makes sense. Companies make earnings… but gold sits. People are productive… but gold is not.

This has led to gold typically underperforming stocks over long stretches of time. Here’s what it has looked like over the last 20 years…

As you can see, stocks and bonds are up over fourfold. And gold is up about threefold. (It’s a log-scale chart.)

Gold was the loser. No surprise there. However – and this is where gold’s big benefit comes in – you can build a simple asset-allocation system among stocks, bonds, and gold – that would deliver dramatically better results – with less risk!

If you had followed this simple, three-asset system, you would be up nearly eightfold over the last 20 years! AND the system is less risky, too. Take a look:

Take a look at the red line… Two things stand out:

1. The three-asset system beats all of the others, by a long shot, and
2. It is dramatically less volatile (more stable) than the others, by a long shot.

So what’s the simple system? You simply own what’s going up…

You could be 100% invested in stocks… You could be one-third invested in each asset class… Or you could be 50% invested in two assets. It just depends on how many of the three asset classes are going up. (If none are going up, then you are 0% invested.)

This idea comes from my friend Meb Faber, who first came across the idea from the excellent research firm Ned Davis Research.

Meb ran the numbers from 1971 to mid-2015 (when he wrote about it). The results were similar to the 20-year chart above. Individually over those 40-plus years, stocks did best (returning 9.9%), and gold did the worst. But the simple system crushed them all… Its compound annual gain was 13.1%.

Not only was the return dramatically better, but the risk was dramatically lower…

A simple way to see it is through the “drawdown”… What was the worst loss?

In the stock market, you would have lost half your money in the worst drawdown. In gold, it was far worse – you would have lost two-thirds of your money in the worst drawdown.

But with this simple system, the worst drawdown was 21%.

Meb sums up the powerful system pretty simply:

Three asset classes: Stocks, bonds, gold. Invest equally in whatever is going up. [“Up” is defined as the 3-month moving average divided by the 10-month moving average.] That’s it. Thumps the stock market with less risk.

Own gold in your portfolio when it’s in an uptrend. It has the little-known but powerful benefit of jacking up your portfolio returns AND lowering your portfolio’s risk.

Don’t forget it!

Good investing,

Steve

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Source: Daily Wealth