gold in a portfolio

Tim Iacono has a posting out regarding the amount of gold to have in a portfolio.  He thinks the conventional wisdom of five percent is too little and uses this chart as an illustration:

First, this is a good example of a situation where overlaying charts on each other doesn’t work.  Presented separately, each of the two charts here provides helpful information.  Together they are mush.

More importantly, Iacono uses the chart to make his case, saying, “Note that you can start out in any year except for 2012 and still come out better off the more gold you hold.”

Had the chart started at the beginning of 1980, however, you’d see the woeful underperformance of gold over the next two decades versus stocks and bonds.  It became worth a small fraction of what it had been in comparison to those other asset classes.

It was wrong to look back at that reality in 2000 and pronounce gold “bad,” just as it is to look back now and pronounce it “good.”  Of course, Iacono’s view is not just based upon past performance (and his recommendation to have more than five percent in gold may be a good one), but the use of past performance in this way to justify the allocation is exactly what trips up investors more than any other single thing.