Red line is SPY, purple is a Gold ETF. Notice in 2007 and 2008 as stocks began to come down, so did the gold ETF. You would have lost in stocks & gold. Gold did begin to recover sooner than stocks, but by the time stocks hit the bottom, the recovery in the gold ETF only made it back to where it was when stocks started to move down in the first place. The net gain from the gold ETF at the bottom of the stock market crash was zero. You suffered the entirety of the crash.
Moreover, if you are always long gold in order to always be hedged, the time period between 2012 and 2016 saw the gold ETF drop significantly, offsetting much of the gains in SPY during that same time.
Gold and silver cannot be relied on as true hedges, and can actually increase your risk.
Invest in a Bearish ETF
Bearish ETFs, or “inverse stock ETFs” move higher when stocks move down.
Sounds like the perfect hedge, doesn’t it?
Actually, I cringe when I hear so-called professionals recommend putting a portion of your portfolio in a bearish ETF as “diversification” or a hedge. Moreover, I feel sorry for their clients who expect professional, knowledgeable advice.
Just a little thought obliterates the logic behind this so-called “hedge”.
If I invest a portion of my portfolio in a bearish ETF instead of stocks, it is equivalent of simply moving a portion of my portfolio into cash.
As stocks move higher, my bearish ETF moves lower, creating LOSSES which are now offsetting my gains in the stocks.
Ridiculous.
If I have 10% in a bearish hedge, and 90% in stocks, I essentially have 80% in stocks and 20% in cash…almost the same exact thing. The difference is the 10% in the bearish hedge is offsetting 10% of the gains in my stocks…when I only had 90% invested…so only 80% is actually working for me.
Moreover, the 80% in stocks will still suffer from a major market correction or crash.