Rebuilt Around Hard Assets: A New Way to Think About Portfolios

MIKE BARNES 0:10

Welcome to America’s Gold Authority Podcast. My name is Mike Barnes. It was 50 years ago, 1976. A couple of financial experts did a study and they concluded that the best risk-adjusted return for your money would be a split of 60% in stocks, 40% in bonds. And that 60-40 split stayed that way for decades until recently. That’s going to be our topic now as we talk to Philip Diehl, the 35th Director of the United States Mint and president of U.S. Money Reserve. And Philip, why did it take so long for people to decide, hey, let’s put precious metals in the mix?

PHILIP N. DIEHL 0:46

Well, that’s a really good question, Mike. I think it’s really an indication of how, you know, really conservative the financial analysis community is. Also, there are financial stakes in a 60-40 split for the financial advisors. They’re more likely to get a commission if money is in stocks and bonds, whereas people who own gold typically buy and hold for an extended period of time, and there’s not much of an opportunity to make a commission on those transactions. So I think that’s part of it. Also, I think part of it is that there’s been so much mythology and ideology and politics around gold for the last, I don’t know, hundred years, maybe longer, uh here in the U.S. And I think a lot of people are turned off by that, including financial advisors. As a result, they they don’t uh really consider it, or if they do consider it, they’re afraid of mentioning it to clients that uh somehow they’ll be tarnished by those sorts of that sorts of rhetoric and and discussion. Uh and then also there’s a lot of financial advisory firms that do not train their uh advisors, their retail advisors on gold and other precious metals. So if they don’t feel confident discussing those issues then and those opportunities, then it doesn’t come up. Uh in many cases, clients have had to come in the door and insist on talking about gold before gold would be uh would be included in their um in their discussion in their portfolios. And typically then it would be a very small portion of their portfolio that would be allocated to gold. Now, this has changed as of last fall. Uh two advisory firms at the highest levels have begun to recognize that a um a portfolio that includes gold has a much stronger track record over a long period of time than does the traditional old 60, 40 stock bond split. And um, so that’s why uh change is on the way, and I think this change in the allocation of gold into portfolios is really the biggest undiscussed issue uh that um that in you know buyers of gold really need to understand.

MIKE BARNES 3:45

Now that it’s a 60-20-20 split, 20% in gold sounds pretty good, but I’m kind of surprised, since it’s considered a safe haven, that that number isn’t even bigger than it is.

PHILIP N. DIEHL 3:56

Yes, that’s right. Uh the 6020-20 recommendation uh came last fall from the CIO of Morgan Stanley, Mike uh uh Williams. And um, and he was the first one to break ranks with the industry, the old 6040 formula that everyone has been hearing. And uh this 6040 formula has had a huge impact on investment portfolios related to retirement 401ks and IRAs. And um, so this this drew quite a bit of attention, and then Wisdom Tree came out and echoed this recommendation since last fall. So two of the two of the big guys have come out and made this recommendation. I did my own run of the numbers of what the comparative performance is between the 6040 and the 602020 uh portfolios, and I was really shocked by the difference. Um, the 602020 has outperformed the 6040 in 20 of the last 25 years and has outperformed by a large margin over that entire period of time. It’s over the last four years plus the first quarter of this year, the 602020 portfolio has outperformed the 6040 portfolio every single year. The 60-2020 portfolio, it’s probably not a surprise because gold is recognized for its uh its quality as a hedge of protecting people against hard times. Uh, and as a result, the 60-2020 portfolio outperformed the 6040 portfolio during the dot-com uh bubble burst, uh during the uh great financial crisis and the great recession that followed, and during both the um the pandemic and the inflationary period that followed the pandemic, every single year the 60 2020 portfolio outperformed the 6040. But in addition to that, and this is the surprise, during some of the big go-go years for stocks, gold still outperformed the 6040 formula. Uh that includes in the years between the dot-com explosion and then the stock market and financial crisis uh of 2008. And it includes these last four years where we’ve seen records set in the stock market year after year after year, but also gold has been setting records during that period of time and it has outpaced that 60-40 split. So the 60-2020 with 20% going to gold has a huge long track record, 21 years. And that’s one of the reasons why I think it’s so clear that the financial analysis uh industry has been so hidebound in sticking to the 6040 formula.

MIKE BARNES 7:31

The old phrase is you’re leaving money on the table, and you don’t want to do that with your investments, with your portfolio. Why are people so high and they always have been about bonds? I know I was taught 40 years ago that it was more of a safe investment, but gold is a safe haven, so why wouldn’t you put your money more in gold than in bonds?

PHILIP N. DIEHL 7:50

Well, for a long period of time, bonds uh were inversely related to the performance of stocks. So bonds were a way of hedging uh against stock market declines, and it was pretty good in that respect, but it hasn’t been so good since 2001, and so much has changed in our world since 2001, just beginning with uh 9-11, and so many other big events have come, and through that process, all of these old relationships have been broken down, and that has been especially true since the pandemic and the uh inflationary period that followed, and now the inflationary period we have today. I think it’s really important if you believe, as I do, that we are entering a new inflationary period that will be driven by higher gasoline prices, higher food prices, higher uh debt, uh both corporate and government debt around the world. If you believe that we’re headed for a more inflationary period, then gold is really crucial. That 60 2020 uh allocation becomes even more important. And I think there’s a general uh consensus. Uh, not everyone agrees with this, but there’s a pretty wide opinion that stocks are unlikely to be as strong in the next 10 years as they’ve been in the last five to 10 years. So all the more reason to be looking at gold. I think that we’re looking at gold prices, uh, and I’m not the only one. There are others who are name brands in the industry, in the financial analysis industry, who believe that gold is headed for $10,000 an ounce uh by 2029 or 2030. That used to sound like a long uh way away, no longer. Uh we’re talking about three to four years. And there’s another thing I want to mention about the 60 uh 2020 uh allocation. It is on a they we we talk about risk adjustment and looking at the risk profile of a portfolio, and you want to balance your the level of risk appetite you have with the uh with the income potential that you’ll have from a portfolio. And not only has the 2020, uh the 60-2020 portfolio outperformed in returns over those 20 years, but it’s also had a lower risk profile over those 21 years. So it’s one of those situations where it’s really unusual where you can have your cake and eat it too, where you can uh have higher returns, but also lower your risk.

MIKE BARNES 11:06

How much, Philip, do you have to live by that 60, 20, 20? Because if you had 20% in gold, say two years ago, that number now may be 50, 35, 15, and your gold percentage is up to 35 and maybe even higher. Do you want to do something about that, or are you just riding the wave?

PHILIP N. DIEHL 11:24

No, you want to do something about that, and you want to do it every year. You want to go back in and rebalance your portfolio. You’ll have winners, you’ll have losers, and as a result, the uh you may end up, as you say, with a you know 15%, 25%, 60% uh portfolio. And so every year you want to go back in and look at those allocations. Um, another thing I want to uh I want to add about the 6040 and 602020 allocations, my numbers include uh the reinvestment of dividends and interest earned on um on those stocks and bonds. So that’s one of the big knocks against gold as well, it doesn’t generate dividends like stocks do. And the fact of the matter is that when you include all of that, gold still uh outperforms in a balanced portfolio like that.

MIKE BARNES 12:32

So, what is the future for 60 2020? Do you think it’ll stay that way, or will they adjust it even more and some expert will decide, no, let’s go 60-3010?

PHILIP N. DIEHL 12:42

No, I I think uh what we’re gonna see is we’re gonna see a gradual shift in the recommendations of other big analyst firms to 60 2020 from 6040. It’s just the record is so clear. And with the run-up in gold prices that we’ve seen over the last two and a half years, more and more clients are walking in the door and really insisting that their financial advisors talk gold with them. And so those financial advisors are getting educated, they’re pushing their firms to educate them more. And so I think there’s sort of a ground up and top-down set of pressures that will drive this allocation recommendation toward 2020. And let me say this that as those recommendations change and as people gradually make the the adopt the 60-2020 portfolio, there’s going to be an enormous increase in gold demand that goes along with this. We don’t have to get to 60-2020 before that impact is felt on gold prices. Um, just the shift of a few percentage points toward gold. Right now, on uh Americans’ uh average allocation to gold is only about 3.8% of their portfolio. So a shift of only, you know, maybe two points or even one and a half points toward that 20% goal will have a huge impact on gold prices. And it’s one of the reasons why I’m really comfortable with uh expecting $10,000 an ounce in only three or four years.

MIKE BARNES 14:43

So if I’m kind of stuck in that rut of 60-40, what do I need to do now?

PHILIP N. DIEHL 14:49

I think what you need to do is go into your financial advisor and say, I want you to run me the numbers on what I would have how my portfolio would have performed over the last 10, 15, 20, 25 years if I had been in a 60, 2020 uh allocation instead of a 6040. And go ahead, you know, and go ahead and tell him, yes, you know, include the reinvestment of dividends and interest earnings in that analysis, because um you can be confident that the performance, if it’s a true analysis, you can be confident that over the last five years, over the last 10 years, 20 years, 25 years, you’re going to see that the 602020 allocation has outperformed. I just have no doubt about it. And what you will see, what you want to do is ask to see how much money, if I had invested, say, $10,000 in 2001, January 1, 2001, in a 6040 allocation and 10,000 in a 60, 2020 allocation, tell me how much money I’d have today from that $10,000. And it’s going to be a revelation to you about how much more money you’d have. So I really challenge um our viewers to uh to drive that issue home with their financial advisors.

MIKE BARNES 16:30

Make those numbers work for you and don’t leave the money on the table. Philip Diehl, thanks so much for joining us today. Thank you, Mike. That is all the time we have for today’s episode. On behalf of all of us here in the U.S. Money Reserve Studios, thank you for tuning in. If you have any questions or you want to learn more about today’s episode, you can call the number in our episode description and speak with one of our friendly account executives. They will be more than happy to answer any questions you may have about precious metals and the strategic role they can play in achieving a secure and comfortable financial future. I’m Mike Barnes. We will see you next time on America’s Gold Authority Podcast.