I hope it doesn’t happen, but a stock market crash is a possibility.
Prices are increasing across the world and the US Federal Reserve is now talking about tapering monthly asset purchases. Other central banks, including the Bank of England, are already considering raising interest rates. Higher rates have historically had a negative impact on the stock market. At the moment, as share valuations are relatively high, an interest rate hike could easily be a catalyst for a crash.
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My strategy – a gold ETC
Thinking about my own portfolio, I want to try and reduce my downside risk. Though there are many different options, I really like the idea of gold as a hedge against a sudden market downturn.
The price of gold is largely thought of as being negatively correlated with stock prices. Usually, when the market collapses investors flock to the asset as a safe haven. During the Covid pandemic in 2020, this is what happened. I realise that in investing there are no guarantees, but if another crash happens, it is likely to be the same again.
Having decided to invest in gold, there are a few choices available to me. One option is that I could physically buy some via a broker or the Royal Mint. However, storage needs to be thought about and can be costly.
In my opinion, one of the easiest ways is through a gold ETC (exchange-traded commodity). This is a fund that tracks the spot price of gold, but trades like a share and is available to buy and sell through most online brokers.
There are lots of ETCs available offered by many investment management companies. Personally, I like iShares Physical Gold ETC (LSE:SGLN). This has been going since 2011, is large in size (over £9bn), and has a low ongoing charge of 0.15%.
No strategy is perfect and this is no exception. Firstly, in a high interest rate environment, an asset without any earnings such as gold may not be as good as investments with yields, such as high dividend shares. Secondly, in times of a rising stock market, gold at worst can suffer large declines in price and at best endure periods of large volatility. Over the last 18 months, as markets have rallied, this fund at its lowest point had declined over 20% from its peak. It’s not an asset choice for everybody.
For myself, I believe the key to building any resilient investment portfolio is diversification. Even today many professional investors still consider gold as a sensible portfolio component.
I think of iShares Physical Gold ETC as a kind of insurance policy against a stock market crash and am comfortable allocating a little portion of my holdings to it.