20% and Portfolio Diversification

By: WGC | 2015-05-04

After speaking with current and potential investors I felt it would be helpful and informative to share a guideline for capital allocation for your personal portfolio.

It should be emphasized though that different factors may vary for each individual investor: personality, risk appetite (willingness to achieve higher reward vs. higher risk), drawdown tolerance, and drawdown duration just to name a few.

The future is unknown. We can make assumptions about the future ("I can buy X and sell at Y"), but we do not know it with absolute certainty. This uncertainty about the future, while it creates opportunity, also creates risk. To mitigate this risk you must diversify or risk not achieving your investment goals.

Since even the best strategies achieve only a 60-70% win ratio (and most of the time even lower), it is imperative that you accept that fact that you are going to lose at least 30% of the time in any trade or investment.

What I have derived is a simple the 20% rule of thumb for asset allocation for your portfolio. No one asset class should obtain more than 20% of your total portfolio, or net assets at any one time.

Current and prospective clients should follow the example below, for everyone else reading, or just generally interested, this is for informational purposes only.



  • 20% of your assets should be in cash

As an investor, you should have about 20% of your assets in cash. This allows you to take advantage of opportunities that arise; also if your portfolio has positions on leverage you can meet the margin call. Having cash allows you to both withstand volatility and take advantage of it if opportunity knocks.

Think of your home falling in value in 2008, having cash on hand can mitigate the loss and also prevent you from over leverage in the first place (buying a home you cannot afford), and essentially meeting the margin call of your bank for your property.

On the reverse side, having cash on hand to buy distressed property and see it gain value in the coming years.

Also, higher net worth investors would have cash across many currencies to hedge against a single currency's risks.



  • 10 - 20% of your assets should be in precious metals

Gold, silver, and other precious investment grade metals act as an insurance policy against a worst-case scenario. Those who experienced the crash of 2008 know you need a back up plan. The worst-case scenario could be large scale warfare, a crash in the financial system, bank failures, the list of fears can go on and on.

Physical metals that have had some value for thousands of years, and will most likely continue to have value for thousands of years. You shouldn't think of this as a pure investment, but as insurance. The price of gold falls; insurance gets cheaper. The price of gold goes up; insurance gets more expensive.

Also recently almost all central banks worldwide have been printing fiat currency. Dollars, Yen, and Euros all to name a few have been printed at an insane pace.

Here is some charts of the money supply.



Simply put, the above chart isn't going down at all, and the long-term trend appears to be going from the lower left to the upper right. A hedge against this is physical metals.

You should try to diversify among the metals themselves, again depending on your risk appetite. Silver is typically more volatile than gold, and the gain and loss in silver is typically greater than gold. Something like a 70 / 30 gold to silver allocation is probably best, but more aggressive investors can do 50 / 50 in my opinion. Also silver takes up 10 times more space than gold, and that can also be an issue. There are other factors that you can look at, like the silver to gold ratio to determine if you think you are getting a long term bargain. Also you need to consider the physical spread in silver is very high upward of 5%+. So silver would have to gain at least 5% of its value for you to sell it back and break even. Also this is why it is more advantageous to buy physical gold over physical silver because the spread is much smaller for gold.

You should try to invest by stepping into a little by little each month until you reach your insurance max. So for some investors that might mean buying X gold coins a month. By step or incremental investing you worry less about the price of gold in any currency, and you are also trying to smooth out the average price point. This is a basic premise for long-term investing. With this investment you are not trying to pick tops or bottoms, you are simply buying insurance.

Next to look at your total portfolio and your personality and assume how much insurance you want when a "worst case" scenario happens. For some people that might be $100,000 for others $1,000,000 (in 2015 dollars mind you). You shouldn't need to go over this max insurance threshold in my opinion.

When you also buy gold or silver you have to assume the worst case scenario has happened, which means the banking system has locked up, like it recently did in Cyprus. This means that also where you store your physical gold is also important. Some investors want to store their physical gold in a lockbox in Singapore (contact me if you want to know more). Also the US in the past has confiscated gold, but this would have to go through the legislative process, so it would be telegraphed, and if that also happened, people would realize that something would be wrong in whatever currency, and again physical gold would be impossible to buy.

It is important to have an ultimate back up plan, and always throughout history fiat currencies and systems have failed, but gold and silver have always stood the test of time. "Gold does not create value, it preserves it."

If the doomsday event never happens, you have something you can pass on to protect your family or next of kin.

Here is a link to some investment grade metals you can buy:

1 oz Gold Bar - Pamp Suisse Lady Fortuna (In Assay)

1 oz Gold American Eagle BU (Random Year)

100 oz Silver Bar - Johnson Matthey

2015 1 oz Silver American Eagle BU



  • 20% of your assets should be in White Gem Capital

I am a big believer in the long term vision of the fund, however, there will be 20% - 25% drawdown periods, and they could be long in duration. While WGC tries to achieve an average monthly performance of 2% - 4%, it cannot be guaranteed. You wouldn't want to have all your assets in one place even if WGC could give you reliable returns over long periods of time. I believe that diversification is the backbone to managing risk, it would simply be unwise to over allocate regardless of how stellar a fund's performance is. 20% is a max, so for higher net worth clients this bullet point might not apply.



  • 20% of your assets should be in real estate

This could be your personal home or other investment property. Even though I personally believe it is very difficult to make a good return on real estate due to the expense side (taxes, repair, maintenance, closing fees, selling fees, buying fees, insurance,etc), you should always have a place to call home. Again like gold, a physical asset.



  • 20% of your assets should be in other personal miscellaneous investments

You could have your own trading account or any other assortment of potential investment classes are out there: fine art, collectibles, stocks, bonds, or other financial assets. You should have some of your own skin in the game. This will help keep you aware of your own assets to some degree.



In the above I have outlined what I believe to be a solid foundation for some simple, yet solid investment advice and how a current or future investor should invest his assets. I hope the above has pointed you in the right direction, and if you are not already an investor in WGC feel free to contact me, see our performance, and learn how to invest here.

Thanks for reading.



Other helpful links:

Investopedia: Risk And Diversification

The pros' guide to diversification