I Can Buy Gold at Costco, Why Not in My 401k?
Would you believe gold has outperformed stocks for more than 20 years?
You can now buy physical gold bars at Costco, and apparently they’re selling like hotcakes.
Why are they buying gold? Partly because they feel bad about the economy. In fact, most Americans have a negative view of the economy and expect it to get worse or stay the same. We’re living in a sort of unending financial hellscape and when things hit the fan what are you going to rely on? The dollar? Bitcoin? Your stocks that are crashing?
No, the only thing you can trust is physical gold — after all it’s been around for centuries.
Sounds kind of nuts doesn’t it?
I mean gold? Come on, what is this Ancient Rome?
Absolutely Shocking
But do you want to know something absolutely shocking? Something that threatens to tear apart your entire world view?
This fact certainly shook me to my living core, but despite the last decade of dominance, US stocks have been underperforming for the last 23 years. Underperforming compared to what?
Gold!
Chart and data via Portfolio Visualizer
The red line is gold. The blue line is US stocks. This starts at the beginning of 2000 all the way through September of 2023, showing the growth of $10,000. Said differently, a $10,000 investment from that point would have yielded the following:
Gold: $58,746
US Stocks: $46,456
Really blows my mind. Even someone who knows very little about investing probably knows you’re supposed to buy and hold stocks for a long time. Yet here’s a 20-year period where you left money on the table not owning gold of all things.
Now I know you can play around with timeframes and get very different results, and most people don’t invest a lump sum and that’s it for 20 years. I’m just making the point that surprising things can happen in markets for longer stretches than one might imagine.
Target Date Funds
Most people have their 401k savings in a “target date fund.” This is a fund that gradually goes from aggressive to conservative over time with a retirement date in mind.
Now the average person doesn’t know anything about these funds — the holdings, the fees, the date. It’s just there. They hope it works out. And that’s actually, for the most part, fine. Because it usually does work out.
However, it has been pointed out by Bob Elliott from Unlimited Funds, that these target date funds are essentially large bets on stocks, prone to significant declines. They also include bonds, but stocks are more volatile and drive the majority of the returns. And they don’t diverse beyond stocks and bonds (i.e., gold).
Let’s say you retired in 2020, using the Vanguard 2020 Retirement Fund. How would you have fared in 2022, a bad year for stocks and bonds?
Oops, you were down 14%. You still would not have recouped those losses to this day.
And that is why people are banging down the door at Costco to buy physical gold…
Now according to Elliott, a more diverse mix that includes 25% in a mix of commodities (wheat, silver, gold), your drawdowns would be less severe and thus pose a smaller threat to your retirement spending.
Another piece of research from ReturnStacked.com suggests adding a form of trend following (“managed future”) to your mix of investments could create better outcomes in retirement. They claim your “failure rate” (i.e., running out of money in retirement) could be reduced impactfully with this added diversification.
The problem is most 401k do not offer these options.
And that is why people are banging down the door at Costco to buy physical gold…
Buy Gold or Don’t
I’m kidding, of course.
I don’t necessarily think people should run out and buy gold or commodities or managed futures. However, I must admit I do have about 5% of my own portfolio in gold and another roughly 25% in various trend following strategies.
Not because I BELIEVE that a stocks-and-bonds-only strategy won’t work in the long run, but because I’m not CERTAIN.
Whatever happens over the next 20 years is bound to be as surprising as the last 20.