Content provided by Paula Wieck, CLS Portfolio Manager
Gold is up about 20% so far this year. This is about the time when investors start asking if we have gold exposure in our portfolios. Whether we do or do not isn’t the point I want to drive home (we do have exposure to gold miners and gold in some portfolios); instead, I want to discuss herding and regret biases. They go something like this…
When you see a security run up substantially, you naturally feel emotional about your portfolio. At first, you feel regret that you don’t own the hot security. Perhaps you feel you should have predicted it would go up (hindsight bias). Why didn’t you buy it at that low price several months ago? (You really should have.) You continue to think about the security as you see the price rise. Finally, you can’t take it anymore, and you buy. By now, it’s run up more than 20%. Over the next few weeks, the security continues its ascent. You’re feeling proud that you pulled the trigger. Then it happens. The security starts plummeting. Your stomach turns. Now you start to feel regret for acting so hastily on the purchase. Shouldn’t you have known after a 20% increase it couldn’t run much further? You have to believe it’s a good investment, so you hang on to it. Finally, you watch all of your gains disappear as the momentum wanes. You’re still reluctant to sell because now you don’t want to incur a realized loss; it’s painful enough to see the loss on paper (loss aversion).
That’s how it goes, and it’s easy to get sucked into this trap. It’s human nature to have these emotions, but when you act on them, it can be devastating to your portfolio.
So back to gold. At CLS, we added exposure when gold was getting beaten up a while back – around the time most people weren’t even thinking about gold – so the exposure has been beneficial to portfolios.
Do we recommend buying it now? Probably not. Even when an investment makes an excellent diversifier, has good quality characteristics, and is deemed an overall “good investment”, the price you pay makes all the difference. Although gold is a great addition to a well diversified portfolio, the time to buy is usually when nobody else wants to.