Today, guest host Jeremy Schneider explains why he removed oil and gold from his portfolio.
In fact, he broke one of his cardinal rules of investing to do it!
He also answers a listener’s question about investing money that’s being saved for a home down payment.
If you’re a retirement investor who is curious if gold or oil (a.k.a. commodities) belong in your portfolio, you’re going to love this episode!
How to Listen to Today’s Episode
Episode Links & Resources:
- 👉 Get Your One-Time Retirement Plan
- Jeremy Schneider
- Types of Assets I Invest In
- Why I Never Buy Gold
- S&P 500 Return Calculator
- Historical Gold Prices
Why I Don't Invest in Gold or Oil
Jeremy Schneider: Welcome to the Stay Wealthy podcast with Taylor Schulte. As you may be noticing, this is not Taylor Schulte. My name is Jeremy Schneider, filling in for Taylor for the month of June.
This is the fourth of five episodes during June where I'm taking over for Taylor. I am recording these a few weeks in advance, but I imagine at this point Taylor has a newborn at home and he is resting comfortably on his paternity leave and hopefully me giving him a little bit of a break on his podcast is helping along those lines as well.
And you can find the show notes and links for this episode at youstaywealthy.com/114.
So I'm gonna talk about why I don't invest in gold or oil or other commodities. Commodities are things that kind of trade on the open market that are, you know, gold oil, pork bellies or precious metals, energy, things like that, that don't actually represent ownership in a business or a productive asset rather than just trading like a physical good essentially.
I used to invest in commodities actually. So when I started investing seriously, I sold an internet company at the age of 34 for just over $5 million and I had this big windfall and I read a book called A Beginner's Guide to Investing that did basically recommend investing a small portion of your portfolio in commodities. And so that's what I did for a while.
And since then I've done something very uncharacteristic of my style and especially of my investing style. And that is I basically changed my mind and I altered my asset allocation. One of the tenants of investing that I basically believe in strongly is to stay the course.
You know, if you're constantly changing your mind based on the hot stock or the hot fund at the moment, you're much more likely to kind of be chasing your tail or chasing the most recent fad looking backward and missing out on forward-looking growth. And so I think a wise investing strategy is to have a plan and then stick to it for very long periods of time.
And in this case, I did change my mind, hopefully not because of a fad, but just because of like more thoughtful reflection on like long-term, you know, the long-term plan rather than what you know is currently happening. And I'm gonna basically break down why I did that. So it's possible and I'm gonna focus on gold. You know, this could be true for basically any of these commodities.
I'm gonna talk about gold just because it has a really nice long price track record. It's easy to measure, you know, one ounce of gold, the price and there's easy to look up those numbers and things like that. So I'm gonna talk about basically gold for this whole episode. But I think you could translate that to any commodity and I'll tell you why at the end.
So on a note, it's very possible to make a strong case for gold. In fact, last summer, in the summer of 2020, all I heard was how gold was the best performing asset class of the last 20 years. People loved quoting that statistic and you know why they loved it because it was true. That was actually true. If you like look between, you know, the year 2000, the year 2020 and you compare it to stocks and bonds, international, you know, basically any of the major asset classes, even real estate gold was the best reforming.
And so people would say to me like, Jeremy, aren't you, why don't you love gold? It's this great performing asset class. Gold is also a hedge against inflation. And right now, you know, we're maybe looking at some inflation happen in the future. I never know what's gonna happen in the future, but certainly over the last year and a half during the pandemic, there have been a lot of influx of new dollars into the economy, which may or may not, we don't really know lead to inflation.
And so gold is kind of another topic of the moment. Gold is a store of value. You know, if you had a bar of gold in 1920 and that bar of gold could buy a house, that same bar of gold today could probably buy at least as nice of a house, right? So just owning that gold. Whereas you know, the house, the price of the house in 1920 was very, very small and the US dollars.
So if you just kept the dollars to buy a house like under your mattress or something, that'd be a very old mattress. And you know the dollars might have rotted by then, which is why paper money is not a very good store of value, both for the currency going down in spending power and the paper maybe not lasting hundreds of years.
But gold is gold also offers diversification. So since 2004, when the GLDETF, so there's an ETTF, the ticker symbols GLD, that basically is a very easy way to invest in gold as a commodity without having to buy physical bars and metal. When the GLDETF was released since then, since 2004 until current day mid 2021, the correlation for the US stock market has been 0.06. And correlation is measured on a scale from negative one to positive one.
So negative one means if, you know, the US stock market went up by a dollar, gold would go down by a dollar positive one means the US stock market goes up by a dollar, gold goes up by a dollar, you know, perfectly correlated. Negative one is perfectly inversely correlated.
And the correlation between gold and the US stock market has been 0.06, which is basically pretty darn close to zero, which is pretty darn close to no correlation, which is actually what you like to see when you're diversifying among multiple asset classes, right? Because if everything correlates perfectly, then why would you add more?
You just, you could, you're just adding complexity without actually getting any of the benefits of diversification. And the reason diversification is good is let's say the US stock market tanks, gold is unlikely to have tanked because it doesn't correlate with the US stock market.
And so maybe that will help, you know, smooth out your overall portfolio and maybe even let you rebalance to like realize some better gains when the stock market rebounds. If you compare gold to international stocks, for example, international stocks have a 0.88 correlation. You know, if you think about it as a percent, gold would be like 6% correlated, whereas international stocks would be 88% correlated. You know, very highly correlated. Okay?
So that's basically the argument for gold. And I think those are, you know, those are all fair points. None of that is not true. So why don't I invest in gold first, let's break down that claim. It's the best asset class for the last 20 years. And like I said, that is true. You know, I've looked into it and when I first heard it, I was a little bit skeptical. I was like, no, well come on gold.
It's just a chunk of metal. But sure enough, it's true. And so if you look at from May 2000 to May 2021, gold has had a total what's called a compound annual growth rate, CAGR. I think in my one of my previous podcasts, I called it a compound average growth rate or something. I think I'm gonna have misquoted that acronym. It's CAGR, compound annual growth rate gold last 20 years, 10.1%. Compare that to the S&P 500s, the S&P 500s CAGR compound annual growth rate has been 8.1%.
So gold wins, you know, it's not dramatic, you know, 2% is a lot for sure over a long period of time, but it's not like the S&P 500 lost money or something. It was, you know, there's a good 20 years for the S&P 500 is a great 20 years for gold.
And so that's true, but that's basically the only window for which it's true. And it's basically, if you look at the charts of these two asset classes, US stocks and gold, it's basically cherry-picking the worst possible window for stocks and the best possible window for gold because for stocks, at the beginning of 2000, the market was at the very end, the.com bubble run up the, you know, the crazy nineties, the stock market was won, run way up and then the stock market experienced the .com bust.
And then just, you know, less than 10 years later the financial crisis. And so it's starting right at the beginning of these two, basically one to the biggest crashes in US history. On the flip side at the beginning of 2000 gold was at a 21-year low, it was under $300 an ounce, a price we hadn't seen since 1979.
So if you were buying gold in the year 2000, you were getting 1979 prices. So then when you compare those two things, buying stocks at relative very, very highs, buying gold at crazy lows. And then you look at how an investment on that day would've performed over the next 20 years gold, slightly by 2% outperforms stocks.
Okay, let's look at some different windows though. How about the last 10 years? You know, how about recently? If you look from May, 2011, instead of 2010, 2011 to 2021, just the most recent 10 years, gold had a compound annual growth rate of 2.1%, two, not ten two. And if you look at the S&P 500 over that same period of time, 14.1%.
So that is crushing, you know, that's not a 2% difference, that's a 12% difference. So if you started investing in gold in 2011, based on the previous great 10 years, you would've had a terrible next 10 years, which has been the last 10 years, right? Okay. And so you might be thinking to yourself, well Jeremy, you're just looking at very recent performance. The 20-year period is longer than the 10-year period.
Alright, let's back up. Let's zoom out a little bit. Let's do the last 40 years from 1981, I was born in 1980, so this is basically my whole life. From 1981 to 2021, that 40-year period may to May gold had a compound annual growth rate and average growth per year if you will of 3.5% the S&P 500, 11.7%.
So it gets crushed by over 8% in this scenario. And so even though that 40-year window includes the last 20 years, which have been really good, when you zoom out a little bit, the 40-year gold return is terrible. Alright, let's zoom out all the way we go to as much data as I could find back to 1915 with the first time I could find both gold and stock market prices.
Since 1915, gold has generated an average cumulative annual growth rate of 4.4%. The US stock market, the S&P 500, or the closest analogy to that before that was actually created over that same 106 years. Now 10.4%, that is a drumming 6%. And so, you know, 4.4% doesn't sound terrible and you know, it's not terrible. It's better than 0% or something like, you know, cash under your mattress would get, which is why I definitely would prefer gold owning gold over just keeping a bunch of cash.
But let's look at the real impact that has had over that time over the maximum amount of data we have available if we take out inflation. So some of that increase in the value of gold is just the increase in the value of everything. You know, just inflation. If we take out inflation, the growth of gold over that period of time is 1.2% compared to the S&P 500 of 7.0%.
That is a big difference. 1.2% per year after inflation is basically close to no growth. And so what would've happened if you invested $10,000 in gold in 1915 after adjusting for an inflation today you'd have $35,000 and you know, not terrible, like 10,000 to 35,000 better than losing money like cash would've relative to inflation. If you put $10,000 in the S&P 500 in 1915 after ingesting for inflation, 13 million, 35,000 versus 13 million.
So when people tell me it's the best performing asset class the last 20 years, I just like roll my eyes. Cause I was like, yeah, that's like the most cherry-picked timeframe. It, you know, sounds good, it's like a good stat because it sounds like a big round number. But basically over every single timeframe, other timeframe, gold just gets annihilated by stocks. So that's the reason that I don't really buy that 20-year timeframe statistic.
How about the hedge against inflation in terms of benefit? Yeah, that's true. But so our stocks, if inflation goes up, companies charge more, they profit more dollars even if they don't profit more buying power. And so owning stocks are also a hedge against inflation, just like gold iron and, and you can see that in the inflation adjusted returns of the stock market versus gold over the last 106 years.
How about diversification? That very low diversification correlation that 0.06%. Yeah, that's true. Like I said, it's, it's all true. But cash is also a diversification against stocks, right? Cash and stocks have a 0.00 correlation because whether stocks go up or down, cash does nothing.
And because you know US dollars, what we measure these things, it's not by definition it has to be a 0% correlation. And so if I'm in the wealth-building portion of my career, which I still think I am, because I'm 40, I still think I'm relatively young, hopefully have 40, 50, 60 years of life to look forward to.
I don't diversify into low-growth asset classes just for the sake of diversification. While diversification is good, if not so good, I would sacrifice potential growth.
So those are basically the reasons that I don't invest in gold. That kind of breaks down the benefits as they're proclaimed and how I look at it. But here's another way to think about it. You can break every asset class down by two different categories.
The first category is whether that asset class appreciates or depreciates. So for example, gold does appreciate, you know, we basically all agree on that over time gold is gonna be worth more dollars. And for example, cars almost always depreciate. You know, if you buy a car, a new car off the lot today, you expect that car to be worth less going forward. So that's one way to break down these assets into appreciates or to appreciates.
And another way to break them down is into productive or unproductive. So a productive asset might be something like a rental property that you own that produces income for you. And an unproductive asset might be something like your primary home, which does not produce income unless you, you know, you're house hacking or something. But generally, no one's paying you rent to live in your primary home.
So if you think of these things as like a little matrix, a little four squares if you will, with productive and unproductive, let's imagine this together at the top. So productive on the right and unproductive on the left and then appreciates and depreciates on the left side with depreciates at the top and appreciates at the bottom, the bottom right square would be productive and appreciates, in my opinion that square is where wealth is built.
So when you find assets that both go up in value and produce income or per productive, they provide income along the way, that is where you get this magic of compound growth.
That's where you return your 10,000 to 13 million, you know, over 106 years. Whereas if it's just appreciating you're going to beat inflation by a little bit maybe. And if it's just productive, you know, a productive asset that doesn't appreciate might be something like a work tractor if you're a farmer or it's productive because it's helping you build your business. But the tractor's going down in value.
You know, if you're a farmer and you need that to run your business for sure. But as a pure investment, you know, I wouldn't invest in tractors. I want to invest in things that go up in value and provide income along the way. And for me there's basically two big categories that meet that qualification. Stocks and bonds like securities and investment real estate.
So you know, in my opinion the best way to invest in securities is through index funds and investment Real estate is a whole kind of big can of worms that I don't think Taylor goes into a ton of this show.
But also a great way to invest. Gold is not one of those nor is oil or any commodity because none of them are productive. They're just basically speculating that someone's gonna pay you more for it in the future than you paid for it now. And that's not how like, like to invest. I like to buy things that I know are gonna be productive so the longer I hold them, the more money I'll make.
So what does an index fund have that gold doesn't have? Well it pays dividends, it represents actual products in the market. It represents companies that have revenues, that have profits. It represents innovation, it benefits from population growth. What does gold have that index funds don't? Well gold is a shiny rock and you can, you know, make a ring out of it or a necklace or something and you can wear it.
You cannot wear an index fund to my dismay. So if your matrix looks different like appreciates and can I wear it then yeah, gold would qualify those two satisfy satisfaction or satisfy those two qualifications or whatever categories. But index ones would not, that's not how I invest. You know, when you are a guest host on a podcast, you can tell people your theory but I like productive and appreciating assets.
Okay, so when would I buy gold? Well maybe, you know, and I might one day but probably not until I'm more concerned about wealth preservation than growth. So at the age of 40 when I'm looking at, you know, more than half of my productive career, because in the first 20 few years I was a child and didn't have was make any money, I want to be in the wealth accumulating portion of my career.
If I was more concerned about hedging against inflation storing value probably the age of 60 plus, then maybe I'm looking at it, you know, it depends on my situation. You know, if I have 20 million then I'm not that worried about it. You know, even if my 20 million turns into 10 temporarily, I'm still gonna be okay if I have a couple million dollars and I plan to spend some it soon or I'm like need to live off of it or I'm especially conservative with regards to inflation or something like that, then yeah I might include gold as a, or commodities as like a small portion of my portfolio.
But even if you're 60 and you look at the actuarial tables and when you're likely to die, you know 60-year-olds have I think on average about 25 years left and that's average. You know, you don't want to plan for average, you hopefully live much longer and 25 years is a very long investing timeframe.
Like I would personally be shocked if over the next 25 years, gold outperforms index funds or investment real estate as an asset class. I would be shocked, you know, I can't tell the future, but that seems like an almost impossibility, especially with things like digital currencies like cryptocurrency may be taking part of what gold used to do, which is be this hedge against inflation store of value.
So that's my take on it. Maybe if I'm older trying to do wealth preservation, but in general I don't like investing in things unless they are productive and appreciating and value. That's why I do not invest in gold or oil. Okay, that is the topic of the day. Moving on, we have a question from Sabrina from Austin, Texas. Our question of the day.
Sabrina: Do you recommend investing to save for a down payment? And if so, investing in what? Thank you.
Jeremy Schneider: Thank you for the question, Sabrina. I'm going to go ahead and assume that you mean saving for a down payment for a house. And so the quick answer is no I don't, but let's break down some numbers. Let's run some numbers.
Let's say you wanna save a $25,000 down payment and let's say you're saving $800 per month, you can save 800 bucks a month and then you wanna get to $25,000 when you have that much, you're gonna go house hunting and use that as your down payment hopefully by that time.
So Sabrina if you're looking to buy the marketable of cool down, I just actually read an article that said like half of houses that got listed last month sold within or when pending within a week or something bananas. So hopefully by the time you save up to your down payment, it'll be a little bit easier to buy a house.
But let's say you did 800 bucks a month saving for $25,000 if you put it into a savings account and let's just assume a 2% rate of return. You know, savings accounts aren't paying that right now, but you know, that's not a crazy average based on history. It would take you 30 months to save up 25,000 bucks. So it would take you two and a half years, you know, like two and a half years of renting saving a hundred bucks a month. Not terrible, okay?
And I know what you're asking, which is man, two and a half years, what a bummer to just leave that cash doing their nothing. I just listened to a whole episode about how putting cash under your mattresses, just like letting it erode to inflation. Yeah, that's true but that's only really true over very long periods of time. You know, like decades over one or two years that isn't as true.
So let's say instead of putting it in a savings account, you put it into an all-stock index fund, basically like a maximally aggressive short of going to Vegas or something investment, all stocks that have averaged historically about a 10% rate of return. If you put your 800 bucks a month into an index fund and you get a 10% rate of return, it'll take you to get to $25,000 instead of 30 months, it'll take you 27 months.
So basically it only really gets you there three months sooner. We're talking about the difference between like March and June or something like that, you know, in three years or two and a half years. That's not a huge difference and that's basically the like, not the best-case scenario, but the average scenario for the index fund. But if we look at the worst-case scenarios, the downside risk of putting your money in a savings count is zero.
You know that money is FDIC insured, that's money is as safe as anywhere we know how to put money. There's really no downside risk. The downside risk of putting into an all stock index fund is 50% or more. You know, there have definitely, you know, just in the last 20 years, the .com crash in the financial crisis.
We both saw the market drop 50% over the course of a year or two. And it would really stink if you had been dutifully saving 800 bucks a month to get to 25,000. And then you look at your index fund when you're about to go make the down payment, you see 12,500 and you're only halfway there despite having put away all the necessary money, right? And so for me, the risk reward just doesn't get there. The reward is three months sooner and the risk is losing half over a short period of time.
It just doesn't make sense. So basically any money I plan to spend within the next few years, I just keep in cash, you know, high yield savings account, you know, money market fund, whatever you wanna do that gets you a few percents like might, you know, buy you a lunch or something these days because there's not much paying in the interest.
But that's what I would do. And like I said, just doesn't, like the risk versus reward doesn't make any sense. There are other options, like you could do a shade of gray between cash and an all stock index fund, like a blended fund or an all bond fund, something like that. But for me it's just a shade of gray.
You know, if, if like kind of the best case scenario is 27 months on average, what are you gonna get there one month sooner if you do it with bonds, but then you are, you're accepting risks with bonds because bonds can fluctuate in value when you need to sell them based on the interest rate, rate whims of the fed of the moment.
And so, you know, and I get this question a lot because it hurts a little bit, you know, like save amounts money and you wanting your money to work for you. But you know, I think you just kind of got to get over it, you know and I hate that that's like such like kind of harsh advice, but I felt the same thing.
You know I've sold properties and had money sitting there, I'm like man, I really wish this money was doing something. But every time I look at the math I'm like, nope, not worth it over a short period of time. Long term for sure. If I don't plan to invest it for five plus years or I'm not sure if I'm ever gonna need it, like boom right into the right, into the index funds, like I'm willing to accept that risk cuz I'm not gonna need it for many years.
But if you're like really saving up for a house, I just keep in cash. That's my answer, Sabrina. I hope that at least, you know, gives you some framework that is the end of the show. Thank you so much for joining.
For the links and resources I mentioned in this episode, head to youstaywealthy.com/114.
As usual, I'll leave you with my two rules of building wealth. Rule number one, live below your means and rule number two, invest early often.
See you next week for my fifth and final episode after which Taylor will be back on the mic.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.