Can gold really protect a portfolio of ASX shares?

There used to be many different asset classes you could use to protect an ASX share portfolio. Cash was always a favourite – as evidenced by the old phrase ‘cash is king’. But fixed-interest instruments like government bonds were another alternative. These assets even had the potential to increase in value during a share market crash or a recession if the government decided to cut interest rates.

Unfortunately, today we live in a whole new world.

Since interest rates are now effectively zero (or 0.25% to be completely accurate), cash is no longer the ‘safe place’ to store wealth for more than a few months. Even if you manage to snag an interest rate on a term deposit or savings account of 1.5% (rare these days), your money is still losing value to inflation.

Government bonds are even worse today. Right now, the yield you can expect from a 10-year Treasury bond is sitting at 0.87% per annum. And these government bonds will only meaningfully rise further in value if interest rates go negative, which probably won’t happen anytime soon.

So where does that leave us if we want to protect our portfolios from any future market crashes? The only real answer that comes to mind is gold.

Gold has always been viewed as a ‘safe haven’ asset and as a powerful vessel for wealth preservation. But is the yellow metal still relevant as a ‘guardian angel’ of an ASX portfolio? Let’s look at some numbers.

A golden protector?

Let’s take a look at how the S&P/ASX 200 Index (ASX: XJO) performed during the most recent market crash.

So from the peak (20 February) to the trough (23 March), the ASX 200 fell approximately 36.5%.

Over the same period the price of gold went from around US$1,611 an ounce to US$1,500 – hardly a protective cloak for a share portfolio.

But let’s also look at gold priced in Australia dollars. So on 20 February, an ounce of gold would have cost an Australian investor around $2,422. On 23 March, this same ounce would have set the investor back roughly $2,600 – giving a nice 7.35% return over the month.

Not quite enough to offset the losses from the share market, but better than a poke in the eye, that’s for sure.

Should we use gold as portfolio protection?

As we have seen, gold can provide some protection in an ASX portfolio, but it is by no means a perfect mechanism. I think investing in gold isn’t really worth doing if portfolio protection is your only goal. If you’re truly a long-term investor, having some short-term cash on the sides is probably a better protection mechanism.

There are other reasons why gold can be useful. Protecting against currency debasement and inflation is one, having a physical and incorruptible store of wealth is another.

But if you really want to build wealth instead of storing it, ASX shares are a far better bet in my view!

More reading

• How you can get very rich with ASX 200 shares
• How I would build a $100,000 ASX portfolio with ETFs
• The TPG share price is up 26.68% in 2020. Too late to invest?
• 3 ASX dividend shares with yields over 10%
• How does the economy affect the ASX 200 share market?

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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I believe that every Australian investor can make $1,000 a month in dividends. To do that you need to invest in ASX dividend shares.

In this era of very low interest rates it’s more important than ever for your money to be working hard for you. High interest savings accounts aren’t really paying ‘high’ interest any more.

ASX dividend shares give Aussie income investors an advantage. Franking credits can really boost the yield (or reduce the tax liability) for Aussies.

If you receive a fully franked $7 dividend then you’ll receive $3 of franking credits attached. A normal Aussie tax payer whose only income is the fully franked $7 dividend would get a $3 tax refund when they do their tax return. It depends on your tax situation and taxable income on how much of your franking credits are refunded, or just reduce the tax liability.

How big does your portfolio need to be to make $1,000 a month in dividends?

Our work income is the most important source of earnings until we retire. It’s much easier to generate work income than build up enough money to make thousands of dollars in dividends.

But compound interest and diligent saving can build up an impressive nest egg. Receiving $1,000 a month in passive income is obviously $12,000 a year. How big of a nest egg you need will depend on what you invest in and the yields those shares have. If your portfolio has a 10% dividend yield then you’d ‘only’ need $120,000.

There are some shares that offer that kind of yield, but not many. And they probably won’t show much capital growth because the profit is largely being paid out as dividends. I’m thinking of shares like WAM Research Limited (ASX: WAX) and Naos Emerging Opportunities Company Ltd (ASX: NCC).

What about a lower yield?

If your portfolio has a 6% dividend yield you’d need $200,000. A 6% yield is still high and today’s ultra-low interest rates mean there aren’t many good shares left with yields above 6%. But the coronavirus sell-off has helped those yields a bit. For that type of yield I’d go for WAM Microcap Limited (ASX: WMI), Future Generation Investment Company Ltd (ASX: FGX), Brickworks Limited (ASX: BKW), Rural Funds Group (ASX: RFF) and Duxton Water Ltd (ASX: D2O). Exchange-traded funds (ETFs) like BetaShares Australia 200 ETF (ASX: A200) and Betashares FTSE 100 ETF (ASX: F100) could offer sustainable higher yields in the future at the current prices once the coronavirus pandemic is over.

If your portfolio has a 4% dividend yield you’d need a portfolio worth $300,000. This is the type of yield where you can invest for both yield and growth. I’m thinking of shares like Magellan Global Trust (ASX: MGG) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) that might be good.

The above numbers exclude the implications of income tax – every reader will have a different tax situation, but unless you need income this year it might be better to go for longer-term growth shares with lower yields.

How to reach your target portfolio size

The share market has historically produced returns of 10% per annum over the long-term. So that may be a decent number to use in any calculations. Right now it’s a decent time to invest with share prices lower than earlier in the year.

If you invest $1,000 a month it would take just over seven years to reach a portfolio of $120,000 growing at 10% per annum. To reach $300,000 it would take less than 14 years.

Market-tracking investments like index exchange-traded funds (ETFs) will help you achieve what the market does. Some of the ideas in this space are iShares S&P 500 ETF (ASX: IVV) and Vanguard MSCI Index International Shares ETF (ASX: VGS).

You could try to grow your portfolio faster than the market by going for the best growth shares. I’m thinking about shares like Pushpay Holdings Ltd (ASX: PPH), Bubs Australia Ltd (ASX: BUB) and MFF Capital Investments Ltd (ASX: MFF).

More reading

• 10 top ASX growth shares to buy in June for strong returns
• 3 ASX dividend shares with yields over 10%
• 10 quality ASX shares to buy in June
• 3 fantastic ASX growth shares I would buy and hold for decades
• Why it could be the perfect time to buy this Vanguard ETF

Tristan Harrison owns shares of DUXTON FPO, FUTURE GEN FPO, Magellan Flagship Fund Ltd, MAGLOBTRST UNITS, RURALFUNDS STAPLED, WAM MICRO FPO, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of BUBS AUST FPO. The Motley Fool Australia owns shares of and has recommended Brickworks, PUSHPAY FPO NZX, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended BUBS AUST FPO, DUXTON FPO, and Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The S&P/ASX 200 Index (ASX: XJO) was on form again last week and recorded a 4.7% gain to finish it at  5755.7 points.

While a good number of shares climbed higher with the market, not all were on form last week.

Here’s why these were the worst performing ASX 200 shares over the period:

The TechnologyOne Ltd (ASX: TNE) share price was the worst performer on the ASX 200 with a 7.8% decline. The enterprise software company’s shares have come under pressure since the release of its half year results the previous week. One broker that wasn’t overly impressed was UBS. It has downgraded TechnologyOne’s shares to a sell rating with an $8.20 price target. Its shares ended the week at $9.14.

The Worley Ltd (ASX: WOR) share price wasn’t far behind with a decline of 7.2% last week. The majority of this decline came on Friday when its shares fell 6% on the back of no news. Not even a positive broker note out of Citi could stop its shares from sliding lower. The broker has slapped a buy rating and $12.20 price target on its shares. This is materially higher than where its shares finished the week.

The Saracen Mineral Holdings Limited (ASX: SAR) share price was out of form and fell 5.4% last week. A number of gold miners tumbled lower last week after the price of the precious metal pulled back. This was driven by lower demand for safe haven assets after investors switched back to risk assets.

The CSL Limited (ASX: CSL) share price was an uncharacteristically poor performer last week and dropped 5.1%. This appears to have been driven by profit taking after some strong gains over the last 12 months. One broker that believes this is a buying opportunity is Citi. Last week it upgraded its shares to a buy rating with a $334.00 price target.

More reading

• Insiders have been buying these ASX shares this week
• Build wealth for life with these 2 ASX 200 shares
• Why I think the CSL share price is a strong buy today
• 10 quality ASX shares to buy in June
• 3 fantastic ASX growth shares I would buy and hold for decades

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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