Among the more interesting news items from last week was the earnings announcement from Palantir Technologies (PLTR), a tech company that supplies software to government clients.
During the call, the company revealed that it purchased $50.7 million of gold bars as a hedge against future volatility. According to Shyam Sankar, the chief operating officer, during an interview with Bloomberg, “You have to be prepared for a future with more black swan events.” Such events are random, unpredictable occurrences that can potentially cause market meltdowns.
At the same time, the company announced sizeable investments in risky start-ups, blank-check companies and may even include Bitcoin and other cryptocurrencies in the future.
At first glance, these moves seem speculative. In reality, the company is positioning itself to gain ground in either a favorable or an unfavorable market environment – a so-called “barbell” approach to investing.
This mindset is relevant to one’s 401(k) portfolio in several ways. Since most participants keep the bulk of their balances in domestic stock index funds (the risky part of the barbell), it may make sense to add a non-correlated investment like gold to the mix.
Contrary to popular opinion, gold is not great as a protection against inflation. Rather, it is the yellow metal’s lack of correlation with traditional stocks and bonds that make it a good thing to own. It may also be prudent to hold gold as the Federal Reserve continues to print dollars at an unprecedented pace and government spending is expanding at a historic rate.
With all the global macroeconomic shenanigans currently happening – including our embarrassing loss in Afghanistan, persistent inflation, and aggressive increase in U.S. COVID cases, there’s a real possibility that the greenback could lose its luster against other currencies. In that scenario, non-correlated investments like gold could be a great crisis hedge.
Stock returns tend to look deceptively smooth over extended time frames. But when the economy contracts and earnings drop, stock prices can swoon much more rapidly than they rise. The tendency of markets to fall quicker than they rally (i.e., “stocks take the elevator down and the stairs up”) can especially wreak havoc on plan participants close to retirement.
Investor psyche
During these periods, damage to investor’s psyche can be considerable, and result in missed out historic gains. During the Global Financial Crisis, for example, many individual investors fled the global stock markets and continued pulling out from 2008-2012, even as the market staged a remarkable recovery, according to the Investment Company Institute. I’m sure that the same thing happened after the pandemic market crash of March 2020.
A barbell approach isn’t just useful during market meltdowns. To better weather garden-variety pullbacks, it makes sense to consider areas of the market that offer more reasonable valuations. Emerging market equities are a good current example. Dogged underperformers for years, EM stocks may finally be poised to shine relative to their developed market counterparts. Commodity price hikes, a weaker dollar, higher inflation, and rising vaccination rates are some of the macro tailwinds that support a position in emerging markets. And don’t forget the valuation differential; in an era where U.S. large-cap stocks are expensive by any objective measure, EM stocks are approaching a twenty-year valuation low versus developed-nation equities, according to Bloomberg.
In the end, it’s all about investor psychology. Markets can be difficult, and perilously volatile, and a lot of the gains can come after panic periods. It’s important to stay invested during these difficult times to ensure the best compounding experience. A barbell approach may make that easier.
Ben Warwick is Chief Investment Officer of Denver-based Aveo Capital Management.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm advises on assets with traditional long-only equity and fixed income, private equity, managed futures, and alternative investment mandates. Warwick is the author or editor of six books on investing, including Searching for Alpha: The Quest for Exceptional Investment Performance (Wiley, 2000).
