Estate planning has been a growth industry for more than a decade, fueled by rising concerns by potential clients about preserving wealth for a comfortable retirement and building a legacy for their heirs. Especially perplexing for many who thought they had a good plan, new regulations and changing rules collided with the Great Recession. As a result, the retirement plans of the leading edge of Baby Boomers (anyone born between 1946 and 1964), and all those who are waiting in the wings, have been disrupted, and their game plans going forward are being re-examined.
Given the enormous amount of monetary stimulus already in place in the U.S.; the global stimulus that is accompanying the resolution of the debt crisis in European countries, including Greece, Italy, Spain, and Portugal; as well as the Feds outlook for interest rates, investors face serious questions about the best portfolio strategies to pursue to preserve wealth in coming years.
It is striking that the typical investment advice provided over the past few years has been driven by simulations and statistical analyses that are predicated, at least implicitly, on the notion that the Great Recession was more or less a run-ofthe-mill recession, akin perhaps to a bad case of the flu, and that the pattern of financial returns over the next three to five years and beyond will be more or less the same as before the Great Recession. Put more directly, the resulting financial advice from 2012 up until today looks much like it did in 2006, albeit with warnings to reduce the annual withdrawals from standard portfolios for retirement spending from 5%-6% to 3%-4%. We are not supposed to notice the not-so-subtle dangers in the form of low returns on CDs and the historically low level of interest rates on Treasury bills, notes, and bonds all staples of conservative portfolios.
If, instead, the Great Recession was more than a mild stroke and therefore will have some lasting effects on financial relationships, then the knowledge required for the successful preservation of wealth needs to include some rethinking of previous norms. Put more vividly, investment strategies should be stress-tested in ways that transcend the rosy scenarios embedded in many portfolio recommendations.
In the face of such uncertainty, we can offer some wealth-preservation suggestions. In a recent study of the investment performance of stocks, Treasuries, gold, and high-quality rare coins, the following findings are perhaps surprising but important:
Correlation of Returns with Inflation (1979-2015)
Treasury Bonds -.21
Rare Coins .60
Note: +1.0 is a perfect positive correlation, meaning asset returns move exactly in tandem with inflation; to hedge against inflation, the highest positive correlation is best.
First, the contention that gold is a better hedge against inflation than, say, rare coins, is not supported by the data. That said, gold is far superior to Treasury bonds. Second, if we use measures of stock-market volatility or the volatility of GDP as proxies for financial-market uncertainty, the same result holds: Gold provides some portfolio insurance, but coins have proven to be a better long-run hedge over the past 30 years or so.
Lets remember what the turbulent 1987-2011 period covers: the 1987 and 1989 stock-market crashes, the dot-com collapse, 9/11 and the subsequent recession, and the 2008 financial crisis and the Great Recession. The above study took hypothetical portfolios containing stocks, Treasury bonds and bills, and proportions of gold and rare coins ranging from zero to 10% and stress tested them against portfolios consisting of 33.3% each of stocks, bonds, and bills what most experts would call a very conservative asset allocation and portfolios consisting of 50% stocks, 25% bonds, and 25% Treasury bills.
The results are robust across many alternative experiments. They show that the annual average volatility of portfolios with modest proportions of coins and/or gold is generally reduced by 10% to 15%, with the average annual portfolio return remaining around 7.3% to 8%. Such a risk-return profile would provide significant insulation for ones wealth and legacy against the stormy weather on the horizon.