Gold is Not a Safe Haven – Don’t Be Fooled.

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It’s indeed a shining moment. Oh, not for you. For them.

The gold bugs.

gold bug

The zealots who over the last three years have been advising investors to purchase gold. They’ve been correct for roughly two weeks. There’s been a stealth bounce in gold prices.

Frankly, gold investors appear to be in a perpetual frenzy. Pundits who preach gold are steadfast in their conviction, recommending gold no matter how low it goes. Sooner or later, they were destined to be right.

Well, here is their moment in the golden sun (for now:)

It turns out gold is relatively risky in terms of standard deviation (a measure of risk), and the largest negative returns of gold are close to the ones of stocks. Per the author “gold is generally not a safe haven for bonds in any market. Gold only functions as a safe haven for a limited time, around 15 trading days.”

Now, we’re not saying gold can’t outperform for periods. We just don’t want you to fall for the impression that the metal is some sort of hard-commodity Snuggie, or offers protection for the long term.

The lives of your investments, the heart of them, are designed to be warm and connected — to sales, to services, products, countries. What is gold connected to? Nothing. You can’t even use it to purchase toothpaste. I tried.

Once I attempted to pay for a subscription to a gold newsletter with gold. I created mass confusion. Enough for an operator to disconnect me. Before rudely dismissed, I was notified by a manager that the writers of this monthly periodical (very popular) would happily accept any of my major credit cards. Or a personal check. Which of course, is backed by the dollar balance in my bank account. Not gold.

Remember: Gold newsletter marketers bank dollars (not gold). Some prey on your fear and paranoia.

Gold’s relevance ebbs and flows based on our fear of the unknown or circumstances beyond our control. How did something of the earth become a store of wealth? Why not apples? At least you can eat apples. If the end of the world does come, you’ll seek apples over rock.

In the apocalyptic science fiction movie “The Book of Eli,” Denzel Washington’s character uses Wet Wipes as a medium of exchange. I’d even take them over gold. Our dollars aren’t going away as a medium of exchange and will be backed by the full faith and credit of the U.S. government. We are not returning to a gold standard as much as Rand Paul would like to think.

Following a doomsday scenario, think of it this way: If gold is winning, then for the most part, you are losing. So pray it continues to be a lousy long-term investment. If gold is rising, most of everything else you own is falling. Not good. It’s in your best interest that gold fails.

There does not exist an academic study nor empirical data which proves gold as an effective inflation hedge. None. The pattern is random at best. Again, owning gold may provide a level of emotional comfort. That’s fine. More often gold prospers when there is instability or lack of confidence in a fiat currency. Could be inflation, also deflation. Regardless, the relationship to inflation or the dollar, is random at best:

Gold is portfolio protection — you’ve heard that one. The message is pervasive on television and radio. No. It has been and continues to be plain old U.S. Treasury securities. Want real diversification or protection? Cash and U.S. bonds do the job:

So you still want to own gold? If you must, keep your allocation limited to 5% of invested assets. There are several methods to consider. Obviously, you may own the medal directly — jewelry, coins, bars. You can investigate gold prices through goldprice.org.

The more efficient and liquid methods are through low-cost exchange-traded funds like SPDR Gold Shares GLD, -0.32%   or no-load mutual funds. The Vanguard Precious Metals and Mining Fund, VGPMX, -1.45%   which is inclusive of other precious metals in addition to miners, has an expense ratio of .29%. Regardless, you’ll require tremendous patience as an investor in this category. Be prepared for long periods of under- as well as over-performance.

True wealth comes from achieving more household cash inflow vs. outflow, combining assets that diversify, managing portfolio risk by preserving capital through market drawdowns, and managing emotions through good and bad market cycles.

Performance of gold compared with the S&P 500 SPX, -1.53% :

Richard M. Rosso is a senior financial adviser with Clarity Financial in Houston. Lance Roberts is a general partner and CEO of STA Wealth Management in Houston.

 

Jurassic Money: 5 Financial Dinosaurs to Avoid.

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Jurassic One

In the 1993 film “Jurassic Park,” Jeff Goldblum’s character argues with the scientists who have assured him that their cloned dinosaurs cannot reproduce. “Life finds a way,” Goldblum says.

Extinct for millions of years, dinosaurs survive on the big screen. They frighten and thrill us out of our cash and generate big box-office bucks. (Their latest romp, “Jurassic World,” has grossed more than $600 million this summer.)

Dinosaurs exist in the real world, too — financial dinosaurs that stomp on your goals and chew up your money.

Don’t feel bad: These prehistoric remnants often thrive in the portfolios or financial activities of even the most astute investors. For massive creatures, they are mysteriously stealth-like when it comes to devouring cash from wallets. Life, you could say, finds a way.

Can you detect the beasts that smash portfolio performance and endanger overall financial progress? Consider these five fossils that require burial deep within the archives of financial services history.

Random Thoughts:

1. Load mutual funds

These ancient beasts roaming the asset classes of your portfolio have long since reached their life expectancy. With more than 16,000 no-load managed or index funds available, paying sales loads on mutual funds is akin to taking a big bite out of your investment returns before they have a chance to run.

Whether it’s the A-share price of admission of 3%-5.75% upfront or the creative B- and C-share classes, where load charges are supposedly deferred (but not really), the total expenses of these investments are a challenge to justify. Stay away from this Jurassic world. It will only lead to financial chaos. If you own loaded funds, monitor them regularly with a watchful eye for exit. Move into more affordable options as soon as their performance lags their benchmarks for two quarters.

no load funds

2. Variable annuities

This blend of mutual funds and insurance busted out of containment long ago and has wreaked financial havoc on thousands of investors. As with the Indominus rex of “Jurassic World” — the product of combining the DNA of multiple creatures into a terrifying monster that would sell more theme park tickets — the financial services industry created these hybrids to benefit themselves through lofty commissions and high fees.

If you own a variable annuity, you’d get better acquainted with what makes this creature tick. Don’t be surprised to learn that annual expenses can be 4% or higher. That means every year a significant portion of your return gets devoured by the ravenous VariableAnnuitus rex. Pay attention to surrender or “exit” penalties that can range from 1%-10% and decrease over a period of years. These charges are designed to hold you captive in the cage with these costly beasts for as long as possible.

Work with a financial or insurance professional to devise a strategy to transfer variable annuity proceeds to less expensive alternatives. To defer taxes, an advisor, if properly licensed, can initiate a process called a 1035 exchange.

Take heart: Not all annuities are prehistoric relics. Deferred-income or single-premium income annuities are becoming more popular as ways to supplement Social Security and generate an income you cannot outlive.

3. Payday and title loans.

These types of loans for quick cash are growing in popularity. Like the velociraptors of “Jurassic World,” they don’t seem too dangerous until the sharp teeth of interest charges and other fees dig deep into your wallet. With interest rates that can easily top 300% APR, rarely are they a smart choice. Several states have passed legislation to help consumers understand how these loans work. Fast-cash lenders cater to people in a liquidity crunch, usually lower-income groups with poor credit opportunities.

The Consumer Financial Protection Bureau is gaining a better understanding of the nature and magnitude of payday, title and other installment-type loans. It’s customary for a borrower to “roll over” these loans and continue to pay fees and interest charges, thus creating a debt trap that’s tough to escape. If you must use these loans out of necessity, realize that the federal government is actively forming a framework to harness these financial beasts and determine how people can seek credit relief in an affordable manner.

lose money fast

4. Emotion-based investing

Our brains are primal. They’re built to keep us alive, not necessarily to maximize our investment returns.

Dalbar recently released its latest “Quantitative Analysis of Investor Behavior” study. This 21-year analysis consistently shows how poorly mutual fund investors have performed compared with market benchmarks. For example, in 2014, the average equity mutual fund investor underperformed the S&P 500 by more than 8.19%. In fact, the return from the broader market was more than double that of the average equity mutual fund investor: 13.69% vs. 5.50%.

One of the more prominent investor pitfalls is called “anchoring.” An anchor can sit heavy on net worth — like a brontosaurus on the chest. Investors who anchor are focused solely on the price they paid for an investment. If the investment turns out to be a loser, anchoring prevents the investor from selling regardless of whether conditions warrant a sale. They strive to “get even.” Anchoring results in opportunity costs or even bigger losses as additional money is put into underperforming investments. To battle this primal enemy, create a buy and sell rule for every investment or work with a professional to guide you.

lizard brain

5. Brick-and-mortar banks

For higher yields, exit the Jurassic period. Virtual banks can link easily to brick-and-mortar options and are FDIC-insured. Even if not for day-to-day banking, online choices are perfect for savings, especially emergency reserves which ideally should hold six to nine months’ worth of household living expenses. NerdWallet offers a comprehensive hub with savings account basics, tips to find higher savings accounts rates and a list of the best online savings accounts.

bad bank

There’s no place in household balance sheets for colossal animals, especially those that have a ravenous appetite for cash. Keep the dinosaurs limited to movie choices, and financial success will be more reality than fantasy.

Jurassic World

This post first appeared on Nasdaq.