Reduce Portfolio Volatility by Adding Gold to Your Portfolio

Describes the volatility of a basket of assets relative to just holding stocks

By: Treasure Coast Bullion Group - 

Every investor wants to experience robust returns in a portfolio, but at what price?  Generally, investors are satisfied with volatility as long as it is associated with positive returns.  It is only when an investor experiences extreme downside changes that they begin to pay attention to the volatility of their portfolio.  A key element to any portfolio strategy is that investors are paid for the risks that they assume, above and beyond the risk-free rate of return.  The higher the risk employed with an investment strategy the greater the potential expected return.  There are several ways to mitigate the volatility in your portfolio, and one of them includes creating a diversified portfolio that includes assets such as gold bars and silver coins.

Portfolio Volatility

The volatility of a portfolio is a measure of the change in the returns of your portfolio.  Historically portfolio managers have used a mathematical calculation call the standard deviation to reflect the volatility of their returns.  Volatility is not only the negative downside changes to a portfolio but additionally the movements in a portfolio when positive returns are achieved. 

The chart above shows how generating a portfolio that has multiple assets will be less volatile over time. The blue line represents the monthly historical volatility of the S&P 500 index from January of 1999 to the present. The orange line represents the monthly historical volatility of the combination of the S&P 500 index and gold. The average monthly volatility of the S&P 500 index from 1999 to the present is 13%, while the average monthly volatility of the combination of the S&P 500 index and gold is 9%.

Goal of Portfolio Management

The primary goal of creating a portfolio is not just to maximize returns but to generate the most efficient return profile. This type of portfolio provides robust returns by smoothing the standard deviations of your returns. Everyone wants to make 25% a year, but are you willing to lose 25% a year?  What you want are returns where the outliers are smoothed providing a muted volatility profile.

Sharpe Ratio

One of the simplest ways to measure risk adjusted returns is to use the Sharpe Ratio.  The Sharpe Ratio created by William Sharpe is a technique which measures the accuracy of a portfolio relative to the volatility of the underlying returns.  The Sharpe ratio measures risk-adjusted returns and divides this numerator by the standard deviation of the average-returns. 

The standard deviation of a portfolio measures the distance returns deviate from its mean return. Standard deviation as a measurement of volatility is lower for portfolios that do not deviate from their mean and higher for portfolios that deviate greatly from their mean. For example, an investment that deviates only 2% from its mean is less risky than an investment with a 10% average deviation from the mean.

The Sharpe ratio can be view relative to one portfolio or another portfolios Sharpe ratio. The higher the Sharpe ratio, the stronger the historical risk-adjusted return performance.   A Sharpe Ratio is re-calculated monthly by portfolio managers as both the average return and the standard deviation change as each period is added. The Sharpe ratio can be used to compare how two or more portfolios compare with each other and earn excess return over the risk-free rate. When evaluating the Sharpe ratio of the S&P 500 index relative to the S&P 500 and Gold, the muted volatility of the latter provides a higher Sharpe ratio making it a more efficient portfolio, and more attractive to an investor who is looking for robust returns and less volatility.

The outlook for precious metals is super-exciting. And while we always recommend investors do their own homework, now is not the time to navigate the precious metals markets without someone at your back.


That’s where we come in. We know the ins and outs of the precious metals business like no one else. Click on this link to get access to your free Precious Metals Investment Kit. Or better yet, give us a call today at 800-982-6105 


Good investing,

The Treasure Coast Bullion Group 

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