Reddit Question
Many investors agree that holding some defensive assets alongside stocks can improve a portfolio.
The harder question is what those defensive assets should be.
One perspective is that bonds are the natural choice. They have historically been the traditional diversifier in stock portfolios.
Another perspective is that treasury bills provide similar protection with less interest-rate risk.
A third perspective is that gold may play a different role altogether, particularly during periods when both stocks and bonds struggle.
Rather than asking which asset was best, it may be more useful to ask what role each asset actually played in historical outcomes.
To explore this question, I compared four portfolios:
All returns are inflation-adjusted and expressed as real annualized returns.
Over shorter holding periods, the defensive asset mattered.
At the 5th percentile, the portfolios produced the following outcomes:
Gold provided the strongest protection in poor historical outcomes.
At the same time, all three defensive assets reduced upside compared to a 100% stock portfolio.
The differences became more pronounced.
At the 5th percentile:
Gold was the only portfolio that remained positive even in the bottom 5% of historical outcomes.
Interestingly, treasury bills and bonds continued to produce remarkably similar results despite being very different assets.
By thirty years, all four portfolios produced relatively strong historical outcomes.
Median real annualized returns were:
The differences in median outcomes were much smaller than many investors might expect.
However, differences remained in both the upper and lower ends of the distribution.
At the 5th percentile:
At the 95th percentile:
One interpretation is that gold historically traded some upside potential for stronger outcomes in less favorable periods.
Treasury bills and bonds, on the other hand, behaved more similarly than many investors might expect.
Historical data can help illuminate trade-offs, but it cannot determine which outcome an investor should prefer.
This analysis looked at a single allocation: 80% stocks and 20% defensive assets. Different conclusions may emerge when using larger or smaller allocations to bonds, treasury bills or gold.
Some investors may prefer maximizing long-term returns. Others may care more about improving outcomes in difficult historical periods. The asset that appears most attractive will often depend on which part of the distribution matters most to you.
Explore the data using your own assumptions in the Portfolio Tool.