Lately, I’ve been thinking about the old 80:20 investing rule… and how it doesn’t make any sense.
According to conventional wisdom, you should hold 80% of your assets in stocks and 20% in government bonds.
However, I think that’s an old idea that doesn’t work in today’s markets.
Bond Yields Are Worthless
The 80:20 rule became popular back when government bond yields were north of 5%. Back then, it made sense to invest in bonds; they offered decent returns.
But that has changed. We haven’t seen 5%+ yields for nearly 20 years (if we exclude a few brief moments, none lasting more than a month).
Why would anyone invest 20% of their assets in a government bond that yields 2%? That’s barely enough to cover inflation.
We have entered a world of permanently low interest rates, and this new environment requires new rules.
My suggestion is to stick with the 80:20 principle but to replace government bonds with precious metals, like gold.
Sky’s The Limit For Gold
Gold is a safe-haven asset, just like government bonds.
However, in this new environment of permanently low interest rates, it has better performed its countercyclical duties.
In the last recession, the price of gold doubled after the Fed cut interest rates to zero.
More recently, in the period since the market topped in October 2018 until today, gold has gained 17.5%.
During that same period, the yield on one-year U.S. government bonds was only 2.6%.
Bonds don’t make sense when they fall below 5% yield. That’s when investors start looking for other safe-haven assets—again, such as gold.
History proves this theory.
In January 2001, the yield on the 10-year U.S. government bond fell below 5%, and everyone knew the Fed would begin dramatic rate cuts. By 2003, the Fed funds rate fell from 6% to 1%.
Guess what else happened in January 2001? Gold started rising rapidly, as investors began looking for new ways to protect their nest eggs.
When you consider we are sitting at the top of a business cycle and that the only way the Fed can move interest rates is down, you can be absolutely certain that bond yields will remain unattractive for years to come.
Moreover, you can expect the value of gold to increase further when the next crisis comes around.
This is why I’m keeping my portfolios allocated 80:20 stocks to precious metals… and recommend that you do the same.