"Diversification is the only free lunch in finance." - Harry M. Markowitz, Nobel Prize in Economics, 1990
Diversification - not putting all eggs in one basket - is the most effective way of managing portfolio risks. The goal of diversification is to ensure that all of your portfolio asset classes are not equally exposed to the same key risks:
- Price Risk - assets that go up at the same time, tend to go down at the same time. Without effective diversification, portfolios can suffer irreparable losses.
- Liquidity Risk - when everyone tries to sell at the same time, liquidity dries up and losses get magnified. Loss of liquidity can have far-reaching consequences - inability to meet current obligations, forced liquidations, etc.
- Model Risk - all financial assets and income producing real estate rely on the Discounted Cash Flow (DCF) model. Adverse changes in model assumptions can have a negative impact on all such assets at the same time.
- Counterparty Risk - failure by banks, brokers, custodians or exchanges to perform as promised can result in severe losses and/or the inability to access one’s assets for extended periods, e.g. Lehman Brothers, MF Global, etc.
- Geographic Risk - location-specific economic, legal or sovereign risks can trigger catastrophic losses in portfolios that are over-exposed to the affected region.
WEAKNESS OF FINANCIAL DIVERSIFICATION
If you are like most investors, it is likely that your portfolio is over-allocated to financial assets, which have become highly correlated and exposed to the same key risks. Essentially, your “financial” eggs are in one basket - your portfolio depends on the over-leveraged financial institutions and your cash depends on the over-leveraged governments.
PHYSICAL GOLD - EFFECTIVE DIVERSIFICATION TOOL
Throughout history, gold has been the ideal portable source of diversification and independent liquidity without counterparty risks. Physical gold is the most liquid non-financial asset and, if properly held, is more liquid than all of the financial assets during extreme conditions. This property of gold remains as valid today as it has in the past.
- Price Risk - in the long term, gold price has no correlation to financial assets; in the short term, whenever confidence in financial assets, institutions and governments goes down, gold prices go up.
- Liquidity Risk - gold remains the most reliable liquidity source of last resort; it is universally accepted and liquid under all market conditions.
- Model Risk - because gold does not produce cash flow, its value does not rely on the DCF model, which provides a major diversification benefit.
- Counterparty Risk - physical gold does not depend on financial institutions; it is no one’s liability and does not rely on anyone’s ability to perform as promised.
- Geographic Risk - physical gold is the only liquid non-financial asset that can be practically held in different jurisdictions without involving financial institutions.
Inclusion of uncorrelated assets, such as physical gold, in a diversified portfolio reduces risk and enhances performance over the long term.
In order to benefit from gold’s diversification properties, it must be owned in a way that ensures independence from financial counterparties and access to global liquidity. TBR was designed to accomplish just that.
Neither the information, nor any opinion contained in this message constitutes a solicitation or offer by TERA Management and/or Tocqueville Bullion Reserve L.P. or any affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. Any data included in this communication is obtained from sources believed to be reliable but cannot be guaranteed by TERA Management and/or Tocqueville Bullion Reserve L.P. Any opinions expressed herein are those of the TERA Management and/or Tocqueville Bullion Reserve L.P. and cannot be solely relied upon as representations.
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