It’s always something, but rarely everything

Gold’s down this year, fairly dramatically so.  This has some investors proclaiming the shiny stuff’s irreversible demise, or maybe wondering why they ever bought into it in the first place.

My view is less dramatic: there’s always something that’s down, but rarely are all asset classes down at the same time. Right now stocks are strong and gold is weak.  But the reverse has often been true, and will likely be true again.

Let’s take a short trip down memory lane and put things in perspective.

The graphic above shows how the returns of seven different asset classes have ranked over the last few years.  The asset classes, represented by widely held ETFs, are color-coded on the left.  The gold ETF, GLD, is shown as gold. International stocks are white, etc.

Gold’s poor recent performance is represented by its position at the bottom of the right hand column. Its negative return is surely a disappointment to gold holders today, but in 2010 and 2011 it topped the chart, and over the last decade or so, the return on gold has been enviable.

By the same token, the lavender-colored emerging markets box was dead last in 2008 but first by a wide margin in 2009 (with a remarkable +75 percent return). Go figure.

Predictably unpredictable

If you’re looking for the pattern in this checkerboard, I wish you luck. Between 2008 and 2009, the rankings basically reversed order, and since then it looks like random hopscotch.

Index investors like ourselves accept and embrace this apparent randomness. We don’t try to explain performance in the past or predict it in the future. We know in any given year there will be winners and losers and we expect to own some of both.

We’ve seen the poor track record of active managers who try to pick hot securities and time the market based on hunch, hope and what they see as patterns in charts like this one. (See “Charts look ominous, but can we trust them”.)

That’s not our approach. We’d rather own a diverse portfolio of low-expense, tax-efficient ETFs representing many asset classes. That way we know we’ll own the winners every year, and just as importantly, never have all our eggs in the worst-performing basket.

John Osbon – josbon@osboncapital.com