Challenging the Paradigms of Investing
1. For all the hype over recent tech initial public offerings, did you know that investors have lost more money in Groupon and Facebook than the entire assets in all of the gold funds? With the endless coverage leading up to Groupon and Facebook's IPO, the stocks appeared to be positioned to the public as a mainstream investment. However, I believe people were unaware of the risks involved when they purchased shares.
Since its price peak on Nov. 4 through July 26, Groupon has lost $15 billion in market capitalization. Facebook has lost even more in dollar value in a shorter amount of time: From its intraday high on May 18 through July 26, the market cap of the company has dropped $34 billion. These losses easily outstrip all the money invested in gold funds in the U.S. combined.
2. Did you know that the overall market has historically been more volatile than gold? Take a look at the rolling one-, three- and 12-month volatility for the S&P 500 Index, Bank of America (BAC) stock, gold bullion and gold equities.
As with any investment, price action over the short term can rise and fall, but what surprises many investors is that gold has had less rolling volatility than the overall market, gold stocks and a big bank stock like Bank of America. In fact, looking over the past five years, BAC has seen more volatility than gold, the overall market and gold stocks!3. While Warren Buffett bashed gold, did you know that Berkshire Hathaway has underperformed the metal over the last 10 years? Gold has been on an incredible bull run over the past decade, and while Berkshire Hathaway kept pace for the first six years, it has struggled to maintain gold's rise since 2006. In his last shareholder letter, Buffett dismissed gold, comparing the rise of the yellow metal to the tulip mania in the 1600s and claiming that gold only "enjoys maximum popularity at peaks of fear." As long as I've been in this business, there have been naysayers who question the inclusion of gold in portfolios. However, because the precious metal typically is not highly correlated with other financial assets, holding a small allocation -- 5% to 10% -- in a traditional portfolio of stocks and bonds has historically added diversification and reduced volatility.
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