Gold buoys model investment portfolio

Gold did its contrarian job in my model exchange-traded fund portfolio in May. Its modest gain, with help from bonds, trimmed the portfolio’s overall loss to 6.1%, a quarter less than the 8.2% tumble experienced by the Standard & Poor’s 500 index.

Also in May, the stock market corrected violently, finishing down 10.5% from its peak on April 23, owing mainly to dread spreading from the looming bankruptcy of Greece, the European Union’s weakest sister. I bought gold at the end of April specifically because I foresaw a correction, but I sure didn’t think it would come so quickly.

Overall the model ETF portfolio performed excellently in May as most, but by no means all, of my strategic decisions performed as expected. So what do we do next?

Here’s how the model portfolio finished this vicious, violent month.

Notice that all of the domestice equity ETFs performed better than the broad market. That’s especially noteworthy because small and mid-capitalization stocks are riskier than large caps, and could have been expected to do much worse.

Why they didn’t? All three are tilted toward the value style of investing (as is the entire portfolio), and value–theoretically a riskier style than its alternative, growth–has the advantage during most of the economic cycle. Growth, which favors steadiness over streakiness, does best in a bear market, but value outperforms the rest of the time.

Also helping resist the downturn in this portfolio were thorough diversification into bonds and alternative asset classes, such as commercial real estate and gold. Only $6 of every $10 are invested in equities.

Alternative asset classes are those with little or no correlation to stocks and bonds. This portfolio invests in three of them, energy, real estate and gold. In May energy took a whalloping, on fears Europe’s woes will stall a worldwide recovery. Real estate did better than stocks, and gold added value while nearly everything else was declining.

Bonds did well if they were ultra safe, as in American mortgages and governments, and poorly if they were riskier, as in corporates and foreign bonds.

As I noted last month, “Sell in May and go away,” is one of the market’s most venerable chestnuts. Stocks traditionally deliver their weakest returns over the summer. That’s because the top talent is on vacation and decisions are left to trading desks that are stocked by clerks so green they can’t get time off till the grown-ups come back in the fall.

But I’m an investor, not a trader, and this portfolio is designed to do well over decades, not months, so I never sell out. You shouldn’t, either. The greatest bull market of modern times began in August, 1982.

Rather I’m holding to a conservative stance, making no changes now. My worst strategic decision–to allocate assets overseats, including bonds as well as stocks–will be rewarded when the euro stops crumbling and the dollar resumes its nearly decade-long decline.

I don’t know when that will happen, but I’m confident it will. So now is a better time to be buying foreign assets than selling them; they are on sale.