Gold Investment As Alternative For Portfolio Diversification
Written by Jack Wogan Sunday, 04 July 2010 07:54
The investment strategy with the highest chance of success is portfolio diversification. It basically means that instead of buying shares belonging to a single company, an investor chooses to acquire shares from two or several companies from different fields of activity. This strategy has two main advantages. First is risk mitigation - in normal economic environments the chance for two different companies from two different economic fields to fail is significantly smaller than the chance of one company going down. Second is increased return of investment. When things go well and both companies achieve their targets, dividends come from two or multiple sources, which is good for the investor.The investment strategy with the highest chance of success is portfolio diversification. It basically means that instead of buying shares belonging to a single company, an investor chooses to acquire shares from two or several companies from different fields of activity. This strategy has two main advantages. First is risk mitigation - in normal economic environments the chance for two different companies from two different economic fields to fail is significantly smaller than the chance of one company going down. Second is increased return of investment. When things go well and both companies achieve their targets, dividends come from two or multiple sources, which is good for the investor.
These rules hold true in times of economic development and stability. But what happens when the entire economy is struck by recession and a bleak period is on the horizon?
For instance, British Petroleum - one of the world's largest companies, who has been the center of attention during recent months because of the oil spill in the Gulf of Mexico. The price of BP shares plummeted 22 percent in just nine day of trading on the stock market, leaving the company without USD 40 billion of its market share. Shareholders are legitimately wondering whether the price will ever come up again and what will be the price they will have to pay for the recovery.
Uncertainty is the word for governmental bonds too. Although they are known to provide a higher degree of protection against market variations than share stock, bonds can also be dangerous to invest. Take the example of Greece - a country with a difficult financial situation, downgraded by international rating agencies, and going through a period of social unrest. Bonds issued by the Greek government were named by Bloomberg and the European Federation of Financial Analysts Societies the "the worst-performing government debt in the world", no farther than last December. On top of this, even in a favorable economic environment, the best performing shares and governmental bonds do not offer protection against the worst enemy investors have - inflation.
During such times, the alternative is turning to the gold market. The value of gold as commodity is based on the market mechanism, which makes speculation difficult. Moreover, the price of gold has been increasing steadily for very long periods of time, and with percentages which always covered the price of inflation. This makes gold one of the few investments able to protect against currency depreciation.