The Golden Rule of Investing

Van Vliet, P. and Lohre, H. (2023) The Golden Rule of Investing. Journal of Alternative Investments, 26 (3). pp. 23-40. ISSN 1520-3255

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Abstract

Although gold is a volatile asset, it is often considered a safe haven that offers protection during bear markets. The authors study this safe-haven hypothesis by analyzing a strategic allocation to gold for a loss-averse investor with a one-year evaluation horizon. A modest allocation to gold indeed helps to reduce the downside risk of traditional stock–bond allocations, yet such risk reduction comes at the cost of return. Conversely, low-volatility stocks are more effective in reducing losses without giving up returns. As a result, a stock–bond–gold allocation considerably benefits from embracing low-volatility stocks and allows for increasing the equity allocation at the expense of bonds. Notably, the effectiveness of this defensive multi-asset portfolio increases with the investment horizon.