Using Gold as a Hedge against Sequence Risk – SWR Series Part 34

January 20, 2020 – Happy New Year! It’s time for another installment in the Safe Withdrawal Series! Here’s a topic that I’ve thought about for a while and that was also requested dozens, maybe even hundreds of times from commenters: What about gold? Gold has been a safe haven asset for many decades (Centuries? Millenials???) and it should have the potential to hedge against Sequence of Return Risk. And I recently found this article on Yahoo Finance: “The world’s super-rich are hoarding physical gold“. Maybe it’s just click-bait. Yahoo Finance must have lowered its standards substantially because they even (re-)published one of my articles last year. 🙂

But seriously, in light of the recent runup in gold prices, rising interest by the world’s super-rich, and the many requests by readers, I’ve finally gotten around to studying this subject in the context of Sequence Risk. Let’s take a look at how useful gold would be as a hedge against running out of money in retirement…

Historical asset class performance

Before I even run any safe withdrawal rate simulations, let’s take a step back and get a sense of how the different major asset classes – stocks, bonds, bills/cash, and gold – performed over the last roughly 100 years. Here’s a table with the annualized, real CPI-adjusted since the mid-1920s. So we would cover the last 10 major bear markets:

Returns 1/1925 to 9/2019. Stock (S&P 500 Total Return), Bond (10Y Treasury), U.S. T-Bill (1Y before 1934, then 3M), and Gold (London A.M. fixing). Based on Monthly data, annualized, adjusted by U.S. CPI inflation

Well, Gold had a positive return, even slightly better than very short-term fixed-income assets like T-Bills. But the average return was lower than that of intermediate-term bonds (10-year Treasuries). On top of that, the risk was also higher. So, should we throw out the idea of gold as a hedge? Well, not so fast! The average return is almost as high as that of bonds and the standard deviation/risk is a two-edged sword, of course. Higher risk doesn’t necessarily have to be bad. Actually higher risk is good if gold vastly outperforms during recessions and bear markets! Diversification is worth giving up a little bit of expected return!     (But for the record, I also still love the Warren Buffett quote: “Gold gets dug out of the ground […]. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”)

So, let’s take a look at those 10 most recent bear markets I studied in my post “Who’s Afraid of a Bear Market?” from a few months ago. Specifically, I like to see how the four different asset classes performed during those severe equity market drops, please see the table below.

Real CPI-adjusted asset Performance following the last 10 prominent equity market peaks (bear market starts). Not annualized, this is simply the performance during the bear market, i.e., the row “2000” refers to the 08/2000 to 09/2002 performance. Note that the mean/median/standard deviation stats are the simple, equal-weighted stats. They are not weighted by the bear market length!

Well, suddenly gold looks pretty good, doesn’t it? It has higher average and median returns during those 10 equity market drawdown events than any other asset class. But just to be sure, there were a few bear markets where even gold lost: 1946, 1968, and 1980. So, gold is still not a fool-proof bear market insurance! But it certainly helped during the two worst market environments for retirees: the Great Depression and the 1970s.

Talking about severe vs. not so severe bear markets, we can make the gold performance look even a little bit better than that if we concentrate only on the five bear markets that posed a serious Sequence of Return Risk problem: 1929, 1937, 1968, 1972 and 2000. And yes, you saw this right: 2007 is not included in that list; despite being the second-deepest equity market drawdown after the 1929-1932 crash, the swift recovery and the record-long bull market that followed (almost 11 years and counting) make the 2008/9 bear market a relatively benign market event for retirees. At least in hindsight!

Asset class return during the worst bear markets from a Sequence of Return Risk perspective.


Before I forget I have to get one big caveat on the record: In the U.S., gold ownership was severely restricted between 1933 and 1974. So, we can certainly run the simulations with this reported price for gold but it’s not clear how the average investor would have used gold as a recession hedge during that 4-decade time span. So, what I’m doing here is not really an exercise of “what if someone had bought a thousand ounces of gold back in 1937” because that was impossible at the time. The simulations here have to be run under the assumption that future asset returns hopefully behave like those in the past. If they do, is it worth investing in gold in the future? And just to be sure, this assumption about the statistical distribution of returns and correlations and comovements over the business cycle can be a bit of a stretch because one could argue that without the government intervention gold prices have evolved differently during those four decades!

Also, I will use gold ETFs in the simulations below. Of course, before 2004 when GLD (SPDR’s gold ETF), came out they didn’t even exist (but correct me if I’m wrong!). One could have bought physical gold, which would save you the annual expense ratio of the ETF (normally around 0.2% to 0.4%) but that would also potentially cost you more due to large transaction costs for trading gold bars and coins: large bid/ask spreads and in some states, you even have to pay sales tax when you buy gold coins/bars!

With all those limitations in mind, let’s do some simulations…

How to add gold to the portfolio

So, how would an allocation to gold impact our safe withdrawal rate analysis? Let’s make some more assumptions about the inputs here:

  • A 30-year horizon,
  • A final value target of 25% of the initial portfolio. Not too different from the average, typical retirement portfolio. For example, this could be a traditional retiree, age around 65, with a 30-yer horizon who likes to hedge a life expectancy to age 95 and leave a modest bequest, 25% of the initial assets, to the kids. Or an early retiree, age 40, who wants to bridge 30 years of early retirement but then still have 25% of the assets at age 70 to supplement Social Security and corporate pensions.
  • No other cash flows,
  • The baseline portfolio has 75% stocks (S&P 500 Total Return Index) and 25% bonds (U.S. 10-year benchmark Treasury bonds).

If we like to add 10% gold to this, there are (at least) three different ways to go about this:

  1. Reduce the equity portion to 65% to add 10% gold
  2. Reduce the bond portion to 15% and add 10% gold
  3. Keep the 75/25 allocation and add 10% gold on margin (e.g., through futures contracts). The way to implement that in the SWR Google Sheet (see Part 28 of this series) is to allocate +10% to gold and -10% to cash. The returns for your 10% leveraged gold portfolio would then be exactly the gold minus the short-term T-bill return, which is, lo and behold, roughly the expected return of gold futures.
Implementing Gold into the SWR simulations is really easy. For example, case 3 involves 10% gold and -10% cash allocation (gold on margin). Note how this raises the weighted expense ratio to 0.075%.

I assume that the gold ETF in cases 1+2 has an expense ratio of 0.25% p.a. (just the widely-used iShares ETF IAU), equity and bond ETFs have 0.05% and cash (CDs, MM, Bills) has a zero expense ratio. Actually, getting gold exposure through futures contracts (case 3) will likely be somewhat cheaper than the 0.25% annual expense ratio.

So, let’s look at the results. See the table below. Indeed, allocating to gold improves the failsafe withdrawal rates from 3.58% to 3.96%, 3.64% and 3.75% in the three different gold allocation scenarios. Moving 10% from equities looks like the overall best route; you get the by far best improvement in the failsafe withdrawal rate. Also, notice how the 4% Rule failure rates are still pretty high if we use all simulations since 1871. But gold does improve your results since 1926 when a lot of other SWR simulations start, e.g., the Trinity Study.

Adding 10% gold, three different ways.

How much gold to add to the portfolio

Having decided that the ideal way would be to reduce the equity portion and replace it with a gold ETF, let’s see how much we should replace. Let’s reduce the equity allocation from 75% to 50% in 5% steps and add gold accordingly, going from 0% to 25% (while keeping the 25% bond allocation) and see how that changes our safe withdrawal stats:

  • You get the highest failsafe at 15% gold, i.e., 60/25/15 allocation so S/B/G. Beyond that, you start lowering your failsafe again.
  • With a 15% gold allocation the post-1920 failsafe doesn’t even occur at the 1929 or 1960s/70s market peaks. It’s right before the 1937 equity market peak.
  • Actually, the failure rates of the 4% rule are still really elevated if we consider the entire simulation period starting in 1871. That means there were many periods when the gold allocation didn’t work pre-1920. But we could argue that the 1871-1920 era also had a very different monetary policy (essentially no monetary policy at all) so it may not be comparable to today.
  • Post-1920, the 60/25/15 allocation also had the lowest failure rate of the 4% Rule.
Adding gold and removing equities in 5% steps.

So, in this particular example, shifting 15% from equities to gold looks best.

Other portfolios involving gold allocations

Three other variations of portfolios that tons of readers have inquired about:

1) The Permanent Portfolio:

  • 25% Stocks
  • 25% Bonds
  • 25% Cash (i.e., short-term, 3-month T-bills or CDs or money market, etc.)
  • 25% Gold
  • Further reading:

The rationale here is that it offers something for every market condition. In other words, you’d always have (at least) one asset class that’s appreciated and thus you’d have assets to liquidate without having to dig into deeply depreciated assets. For example, if you find yourself in an equity bull market, you sell equities. If we’re in a demand-side (deflationary) recession and bear market (2001, 2008/9), stocks may be down but bonds will rally. If we’re in a supply-side and thus inflationary recession (e.g., in the 1970s, early 80s), you sell gold because both stocks and bonds got hammered.

And when all else fails and all risky asset classes (equities, bonds, and gold) are down you got your T-bills, CDs, and money market accounts. Sounds intuitive, right?!

2) The Ray Dalio/Bridgewater “All-Weather Portfolio”

  • 30% Stocks
  • 55% Bonds
  • 15% commodities, of which half are in gold (e.g. iShares’ IAU) the other half in an overall commodity index ETF (e.g. GSG). I don’t have a long enough return history for the overall commodity index – the GSCI index exists only since 1970 – so I can only simulate this assuming a 15% allocation to gold, instead of 7.5% gold + 7.5% all commodities.
  • Further reading:
  • Just as an aside, this portfolio is not the actual allocation of the famous Bridgewater hedge Fund. You have to do something a lot more sophisticated and profitable to justify charging clients 2 and 20 (2% management fees and 20% of the gains)! So, don’t get fooled by some hacks telling you that they can show you the “super-secret” allocation of Bridgewater! Ray Dalio will keep the intellectual property that generates hundreds of millions of dollars in fees every year to himself!!!

The appeal of this portfolio comes from the so-called risk-parity allocation. The portfolio shares are (very approximately) inversely proportional to the asset class volatilities. (side note, the actual calculation is a bit more complicated because you set the weights of the portfolio so as to equalize each asset’s contribution to the overall portfolio variance, which also needs to factor in the covariances!). So, you’ll avoid the issue of one single asset class taking up the overwhelming part of your portfolio risk (such as equities causing 90+% of volatility in a 60/40 portfolio) and it gives you some of the same flavors as the Permanent Portfolio: something for every market and macro condition.

I’m running two versions of this. First, with a 55% allocation to intermediate (10-year) Treasuries. But notice that not all bonds are created equal. Frequently, the recommended 55% bond allocation is comprised of 15% shorter-term bonds (e.g. 5-year Treasuries) and 40% long-term bonds (20+ years maturity). But I only have long-term monthly returns for the 10-year U.S. Treasury benchmark bond, so I have to improvise here.  With a 105% bond and -50% cash allocation (i.e., 55% bonds plus another 50% bonds on margin) we would approximately match the weighted average maturity and duration of the Bridgewater portfolio.

3) The Golden Butterfly:

  • 40% U.S. Stocks, of which half is held in a broad market index (e.g. total market or at least S&P 500) and the other half is in small-cap value stocks
  • 40% Bonds
  • 20% Gold
  • Further reading:

I run the simulations of the GB portfolio once without the small-cap value bias and once with it because I like to see how much of the change in results is due to the 40%/40%/20%  S/B/G allocation and how much comes from the Small-Cap-Value tilt.


Let’s see how these portfolios do from a Sequence Risk perspective, see the table below. I also include the baseline portfolio (75% stocks, 25% bonds 0% gold) and the 60/25/15 portfolio for comparison. Overall a pretty disappointing picture:

  1. The Permanent Portfolio had the lowest failsafe rate (2.61%). What’s really sneaky about this portfolio is that you certainly improve the performance during the well-known stress periods (1929 crash, 1960/70s) but you create a serious deficiency elsewhere (1930s, more specifically the 1937 bear market) with a sub-3% safe withdrawal rate. It’s like squeezing a balloon! You solve the problem of the 1929 crash but create an equal-size problem or worse elsewhere. Not much of a surprise here; I’ve always had my doubts about the permanent portfolio because you have only 25% of your portfolio in truly high-return assets (stocks) and the rest is exclusively invested in assets that had very little real inflation-adjusted return (cash, gold). And bonds certainly had a decent real return historically, but currently yields on 10-year Treasury bonds only just about reach the inflation rate. 30-year bonds have a yield less than 1 percentage point above most inflation forecasts. Not enough to sustain a 30-year retirement!
  2. The All-Weather Portfolio suffers from the same problem. You do remarkably well in the 1929 crash. But then you open the door for really bad performance in the 1930s and 1940s, i.e., during times when the baseline portfolio didn’t have any problems sustaining a 4% withdrawal rate. Robbing Peter to pay Paul! Also, the all-weather portfolio with an elevated bond duration will have a lower fail-safe in the 1960s than even the baseline portfolio without any gold (3.57% vs. 3.58%). That’s a disappointment, but not a huge surprise: The bigger the bond exposure, the worse the pain during the inflationary 1970s! And both AW portfolios and especially the long-duration one have some of the worst failure rates for the 4% Rule I’ve ever seen. Not a pretty picture!!!
  3. The Golden Butterfly Portfolio (with small-cap-value) will give you a decent improvement in the SWR stats relative to the 75/25/0 portfolio. But not noticeably better than the 60/25/15 portfolio. But notice that all of the improvement of the GB portfolio comes from the stellar historical performance of Small-Cap-Value stocks and not so much from the gold allocation. Without the boost from small-cap-value, the SWR stats are actually worse(!) than under the baseline portfolio without gold! Well, if you remember my post from last year “My thoughts on Small-Cap and Value Stocks“, my personal working assumption is that SCV will likely not give you the outsized excess returns it might have given you historically. Blame the fact that this style is now so well-known and there are a lot of ETFs and lot of retail and institutional investor money chasing this premium. It stopped working about 15 years ago, right around the time when it became popular!
Some of the widely-cited exotic portfolios. Curb your expectations!

So, the widely-cited exotic portfolios don’t exactly deliver any notable improvement in the safe withdrawal stats. I’d stay away from them! If you want to use gold to hedge against sequence risk, shift some of the equity portion into gold. But stay away from the “sexy” portfolio allocations recommended by the internet gurus and motivational speakers!


Just for full disclosure, except for a quarter-ounce Gold American Eagle coin I got from my late Uncle Karl I own no gold. So, with a little bit of confirmation bias, I set out to prove that gold has no place in a retirement portfolio. The average return over time is simply too low. But gold shines (pardon the pun) when all the other asset classes are hurting. And that’s a huge benefit! Not so much in the pre-1920s era but at least during the last 100 years and during some of the well-known bear markets and recessions.

I particularly like the fact that gold seems to work well both during inflationary recessions (1970s) but also during the bad demand shocks that conjured up fears of a deflationary scenario (2008/9).

So, am I going to increase my gold holdings? Probably not. At least not right now. Here are two reasons:

  1. Procrastination: Yeah, I admit it, I’m a bit of a procrastinator. But there is even a good rationale to stick with equities; let’s just ride the equity momentum a little bit longer. I don’t see any imminent risk for a recession around the corner and I hope that the music doesn’t stop playing in this financial version of musical chairs anytime soon. Update: oops, that didn’t age well! Just two months later, we had the 2020 recession. And gold would have worked quite well as a diversifier again!
  2. Inertia: Making a major change is hard! For me to go from 0% gold to 10-15% gold allocation would be a major shift and I’d need to see evidence almost “beyond reasonable doubt” to make that move. But with the lingering doubts about whether gold will perform as well as in the past (see the disclaimer and the caveat about the gold ownership restrictions and the government fixing prices above), I’m still on the fence about putting a six-figure sum into some useless metal just sitting around and not generating any dividends. But likewise, if you currently do own 10-15% you probably don’t see any clear and convincing evidence to move out of gold either.

So much for today! Maybe readers can convince me to shift from equities into gold now?!

Thanks for stopping by today! Please leave your comments and suggestions below! Also, make sure you check out the other parts of the series, see here for a guide to the different parts so far!

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149 thoughts on “Using Gold as a Hedge against Sequence Risk – SWR Series Part 34

  1. Thanks for this insightful assessment. Interesting to see how some gold in the portfolio could have had a positive effect on your swr. Need to look into this effect myself as well to see whether it adds any value for our portfolio.

    1. Thanks! Yes, before plunging into a gold ETF, I’d check if this fits your personal situation.
      For everyone still in the accumulation phase before retirement? Certainly not. For people in retirement worried about a market peak? Maybe yes.

  2. I prefer digital gold (Bitcoin) to Gold but neither as part of my SWR portfolio. Gold is too cumbersome to carry across a border without confiscation. Consider Jews in Nazi Germany or Vietnamese refugees leaving the country. Coming from a 3rd world country.

    Folks who only lived in the developed world often forget how quickly things can go bad to worse.

    1. Well, gold can be “carried” electronically just like Bitcoin. ETFs, Futures, etc.
      Also, Bitcoin exchanges can be hacked, so there’s a downside. And if it can be hacked by some criminals it can (will?) be eventually hacked by the government.
      But certainly an interesting alternative…

      1. If you’re interested in bitcoin as a way to avoid government confiscation, you don’t want to hold it at an exchange. Instead you keep the keys yourself. Write them on a couple pieces of paper or memorize them; it’s 24 random words. You can restore them on any computer and transfer them to an exchange in your new country, a little at a time so an exchange hack won’t hurt you much. (But if you lose those words, you’re screwed.)

        1. Haha, that’s a good one. But make sure your house doesn’t burn down if it’s on paper. And if I memorize the codes, what if I die? I could tell my wife, of course. But what if we both die in a car wreck?
          Seems a little too complicated. Maybe a gold ETF or Gold futures are OK for now. And if AOC ever becomes Treasury Secretary I hope I’ll have enough time to sell everything and park the money in Bitcoin the way you proposed. 🙂

          1. Note that I’m specifically talking about the scenario above where you want to “carry across a border without confiscation.” A gold ETF doesn’t really help with that.

            If you want crypto and you’re not worried about government confiscation, there are ways to hold it that are more secure against accidental loss.

  3. Big ERN wrote about gold in a portfolio! I am in heaven!

    I have for some period of time incorporated a 15% gold holding and a 15% long govt bond holding into my portfolio (70% equities). That was on the basis of the insight of the Permanent Portfolio concept that volatile not perfectly correlated assets can enhance risk adjusted returns. On the other hand, too much diversification dilutes the ability of equities to deliver the returns needed to sustain long term performance. A balance is needed.

    This analysis is very comforting in confirming the role of a gold allocation in the portfolio of a FIRE proponent. It is a counter intuitive asset, but one that might have a real role to play in sustaining long retirements!

  4. Thanks for the insights! I find your blog very useful
    I like the idea of holding gold in my portfolio, but I prefer to sell puts instead of holding the metal. I like the idea of having a non correlated source of income. Usually I have between 5 and 15% exposure to metals, in the form of puts.

    1. Yeah, nice idea! Selling puts is an interesting idea too. Of course, you miss the upside (at least short-term) which defeats the whole purpose of gold as a safe haven asset. But it’s certainly a nice way to deal with the low expected return issue.
      Maybe that’s the way I can be convinced to get some gold exposure. Through the option delta! 🙂

  5. How did your test account for the fact that gold prices prior to 1971 had largely been fixed to the dollar? We only have 50 years of data to test on gold.

    Thank you for mentioning the fact that US citizens could not own gold legally for several decades, starting in 1933 and ending in 1974.

    Now do bitcoin 😉

    1. Haha, Bitcoin has too short of a history. But an interesting idea, for sure.
      I have the gold price time series since 1871. So, again, there was a price and you can calculate returns. You can also find comfort in the fact that the 1929-1932 bear market was tested with actual returns and the 1970s gold run also came with actual returns.
      So, both events that were a danger from a Sequence Risk perspective showed good gold returns. Plus the 2000 and 2007-9 events.

    2. This is an important point (the gold standard). During this period you may have wanted some gold (assuming you could own it in some form – e.g. jewelry) in case, as happened in 1934 and 1971, the government raised the dollar price of gold. If you were pretty certain, however, that the government would maintain the gold standard then you could hold cash and be paid interest for it.

  6. Excellent blog as usual. Thank you for this post! We have been contemplating whether we should include gold in our portfolio, and this gives us more information to ponder.

    1. Yes, I was surprised how well this worked. For people who were already inclined this would look like a great reason to pull the trigger.
      Personally, I’m still a little bit on the fence… 🙂

  7. In the section, HOW MUCH gold to add to your portfolio?, did you mean to say “gold” instead of “bonds” in your closing sentence:

    “So, in this particular example, shifting 15% from equities to bonds looks best.”

    1. It might as well. If you look at it this way: bonds have zero real return right now. Gold has the potential to realize some nice returns in the future due to geo-political tensions, a recession in the medium-term, etc.
      So, 40% bonds seems a bit excessive.

  8. I’ve been holding Dalio’s All Weather in my IRA since beginning of the summer. Minus the volatility of treasuries at the end of 3rd quarter, I’m finding the portfolio, as of late, kind of a bond proxy. Compared to BND, for instance, the returns are similar. It is alot more diversified than a strict bond/intl bond etf holding. Great to see this thing move in opposition to the market most days. And happy to have something a little different going into this year. Now, I’m not putting the whole kaboodle into this. IRA accounts for roughly 15% of overall NW. It’s either do this or use the IRA to rebalance taxable with similar holdings. For now it’s fun to have a little gold + long term treasuries. Inflation and interest rate increase be dammed. But acknowledged that it is in IRA so I can bounce out when/if ever needed.

  9. Similar to small-cap value and real estate, do you think the historical benefits of holding gold (vis a vis safe withdrawal rates) will fade away (or already have vanished)?

  10. Another very interesting report, thanks Big Ern! It certainly would have been preferable to study gold returns w/o the side issue of US restricting ownership. Also, what effect did that have on the 1972 gold returns which were clearly those most positive (by an enormous margin) in the last 100 years. Looking at the 10 recessions in the chart the only one that really showed a sizable bump from gold was 1972. Same for looking at the 5 worst recessions. So it seems to come down to looking at 100 -ish years of data and only 1972 makes the case for gold and only during recessionary periods.

    1. This post has piqued my interest so I went to Portfolio Visualizer to experiment a little bit. If you compare 1- US Large Cap equities, 2- 10 year Treasuries and 3- Gold, they have data starting in 1972. I ran three portfolios all with 70% US Large Cap but varying the 30% between 10 year treasuries and gold. If you start with 1972 or 1973 the portfolios with gold out- perform the treasuries, by 1974 that advantage disappears. Progressing through the seventies and eighties the treasuries outperform gold, it some cases very substantially.
      Over the last decade or so 10 treasuries have had a very poor return, if that were to continue it would make the case to mix in some gold. It might be worth a try…treasuries would be safer but they might just be safely yielding next to nothing. It’s never easy!

    2. Yeah, the 1972 episode was certainly due to some catching up after the price was artifically depressed for several years already when inflation went up and the gold price was kept steady.
      But that doesn’t take away from the appeal for gold. The 1972 retirement cohort would have gained a little bit less. But the 1965/66 and 1968 cohorts (also very bad Sequence Risk) would have benefited earlier from a free-floating gold price.

      And yes: gold only “works” during recessions. But we’re closer to the next recession than the last one. So, gold is only a hedge, only for protecting the downside. Not for getting rich quick!

  11. Dividendgrowthinvestor makes an excellent point. Gold’s returns since 1971 has been comparable to the S&P500. One other important point: The world has never before seen $15T of “negative” yielding sovereign debt.That is a huge incentive to own Gold.

    1. Per Portfolio Visualizer, $10,000 invested in 1972 in the US Large Cap would now be worth $1,150,297. $10,000 invested in Gold (also 1972) would now be worth $326,332. Ouch!

      1. You missed the whole point. Nobody ever claimed that gold will outperform stocks in the long-run. The idea is that it’s a Sequence Risk hedge, i.e., when we make regular withdrawals.

        See example below:
        $1,000,000 initial portfolio
        $40,000 annual withdrawals.

        Portfolio 1: 100% Stocks
        Portfolio 2: 100% Gold
        Portfolio 3: 70% stocks, 30% gold.

        At the end of Year 2019:
        Portfolio 1: $8,953,902 (the lowest)
        Portfolio 2: $10,345,968 (higher than stocks!!!)
        Portfolio 3: $36,839,387 (highest)

        1. Sorry for the confusion. The comment I made above ” Per Portfolio Visualizer, $10,000 invested in 1972 in the US Large Cap would now be worth $1,150,297. $10,000 invested in Gold (also 1972) would now be worth $326,332. Ouch! ” was in reply to Vens comment ” Gold’s returns since 1971 has been comparable to the S&P500.”
          It was meant as a simple illustration that gold returns have NOT been comparable to the S&P 500. Had I addressed my comment to him specifically it would have been more clear. My bad.

  12. Big ERN, I own ~5% precious metals in my “fun money” trading account, glad to know it’s not a bad play.

    Knowing that you enjoy option trading, you may have a bit of fun selling a few puts, that’s how I established most of my positions. I also sell covered calls once I’m long and up on a position. Just a thought…

    Great post, per usual.

    1. Yeah, great idea. That would alleviate the low-average-return problem. And since I’m already selling options, maybe that’s how I will eventually get my foot in the door investing in gold. 🙂

  13. Great article. I’d suggest that there are two other things worth considering: 1) Try a starting point of 1971 because before 1971 bonds were indirect proxies for gold since the dollar was still redeemable internationally for gold, and 2) Try allowing the bond component to drop. I’ve concluded that a 60% stock and 40% gold allocation gives a really nice 10 year horizon rate of return with surprisingly high predictability. A couple of videos I’ve put together on the subject are below if you’re interested.

  14. Hello Big Ern!
    I’ve been looking forward to this post. Thanks for putting together this analysis. Your SWR series has taught me not to be exclusively focused on expected long term return in my portfolio. As an early retiree my top concern is sequence risk. I am using many of the tools you have mentioned, including glide path and SPX puts. I even moved 10% of my portfolio from bonds into gold ETF IAU 8 months ago (after playing around with the numbers on your SWR worksheet). Also, I’m glad you pointed out in the comments that gold must be in an IRA. It gets horrible tax treatment in a brokerage account.

    While playing with various asset allocations on your SWR spreadsheet, I got the best SWR rates with gold allocation of about 10% (not sure why I didn’t come up with the 15% you calculated). But the thing that really jumped out at me was how helpful gold has been historically in a high Shiller CAPE environment (particularly when the index is over 30 such as it is now). I wonder if you have looked at this. Thanks!

    1. Exactly! This is something I didn’t mention very much, but you’re right: gold helps you more in a high-CAPE environment, which is exactly when you want the protection! Excellent point! 🙂

      1. SPX puts – Where do I read more information about that?

        I also want want to say thanks Big Ern for your blog. I am definitely not going to mess up too much. My portfolio is at $362k, which is much less than your but at least I know that is very unlikely to it will ever get to a haircut of 50% and if it will ever get a huge haircut, I will definitely know what to do.

          1. Thanks. I won’t do anything crazy and I am very cautious in the derivatives field. Some fancy firms actually went BK because they thought they knew the answer.

  15. Thanks for putting this together. Really was hoping you would address the risk parity portfolios. A couple observations/thoughts.

    1. It would be interesting to see you couple these observations with your glidepath work. A part of what has attracted me to the all-weather allocation (- commodities) is the lack of historical volitility in times of change. This comes at the cost of upside when things get better. What if we did a cape centric glidepath from the 60/25/10 to the equity centric allocations?
    2. Can you elaborate at all on how you adjusted the bonds allocation to reflect the long treasury holdings (105% section)?
    3. This is really a general observation which is obvious – but the sampling timetables drive large swings in outcomes. I was fiddling around with efficiency frontiers and found if I started with gold in the early 90’s it dominated the holdings one should have. This is only to say that the time tables one analyzes has a huge impact on the outcomes or what was the best move. And the question of what constitures a statistical ‘Population’ becomes a thing (eg is looking at 1929 event remotely legit in an analysis?). That said am curious about how you personally view the impact of changing times (asset corelations etc., taxes, whatever) on these forcasting efforts.

    1. Great and a timely post Mr ERN. Had the same query that jdoggy1 articulated above. How would a rising equity glide from 60/25/15 to 100% equity during the first 15 years affect the withdrawal rates?

      1. That might be good way to deal with the low long-term returns of gold. I haven’t “hacked” the SWR Google Sheet yet but I suspect it would look similar to the GP simulations before; you can improve the failsafe a little bit more.

    2. 1: There isn’t one single simple Risk Parity portfolio. There are many different ways to set this up, mostly varying by by what kind of risk estimate you’d use. Very short-term risk, then you get very fast-changing tactical asset mix changes. Very long-run risk estimates (very stabele) then you’re roughly back to the All-Weather portfolio.

      2: Look at the duration and average maturity of the actual recommended AWP. then scale up the 10Y Treasury portfolio with leverage to match that duration and maturity.
      3: Because of the changing correlations it’s best to stay robust to the different economic regimes (supply vs demand-side shocks). So, if your SWR analysis works well in both the Great Depression and the 1970s/80s, that’s a good sign!

  16. Thank you so much for writing this as I am a fan of the permanent portfolio and golden butterfly. Have you considered that these use long term treasuries and not intermediate term? This “barbell” approach of using cash (ultra short term) and long term treasuries May perform differently than an approach using intermediate term treasuries.

    1. I don’t have the long return data for the 30Y government bond. So, for simulations, the intermediate one is the one I use.
      There are pros and cons of the barbell. You can run portfolios with different weights. Say, if you replace 40% of Int.Bond with 20% Long bonds and 20% you get very similar results. But again, it all depends on the weights of the long bond and cash.

      1. Thank you for this! This article means a lot to me as I respect you a lot and you’ve shown that a modest investment in gold within a diversified portfolio is at least a defensible choice. It’s important to have this solid analysis because this asset class is largely derided by many in the financial media main stream.

  17. Thanks BigErn for the detailed analysis, I really appreciate the effort you have done to produce this result and share it with us despite it against your own personal believe and your own assets allocation.. this what I call technical and scientific honesty.

    I am allocated 70/15/15 S/B/G.. I think it is time to shift to 60/25/15 as you have demonstrated on this article. move 10% from stock to bond. the only hesitation I have is the low interest rate in the bond currently.

    I am going to be critical to some of the statement you have in this article. Sorry

    “>Procrastination: Yeah, I admit it, I’m a bit of a procrastinator. ”

    We ALL Human tends to overestimate our ability to predict the future. it is interesting to see this human behavior creep to the most educated financial blogger I know.

    ” >I’d need to see evidence almost “beyond reasonable doubt” ”

    Seriously, after writing this analysis yourself… you need more evidence … I am shaking my head.

    “It stopped working about 15 years ago, right around the time when it became popular!”

    I call this a recency bias by assuming the last 15 years is the new norm.. Imagine I come to you in 2011 and claim that Gold is the best investment and Stock Index has stopped working in the last 12 years…

    1. “We ALL Human tends to overestimate our ability to predict the future. it is interesting to see this human behavior creep to the most educated financial blogger I know.”

      Again: as I said, there is a rationale, i.e. the posiive equity momentum. You could have improved the SWR by shifting to gold right in September 1929. But if you’d moved to early (September 1926) then that would have been counter-productive. Hence, my hesitation right now.

      “Seriously, after writing this analysis yourself… you need more evidence … I am shaking my head.”
      As I said before: the gold historical performance still has a bit of a asteriks. I don’t fnd it 100% convincing. Not even 90% convincing.

      ” Imagine I come to you in 2011 and claim that Gold is the best investment and Stock Index has stopped working in the last 12 years…”
      That’s not a good comparison. There are macroeconomic reasons why equities will always outperform gold in the long-term.
      I don’t see why value or small-cap stocks must outperform the overall market in the long-term. Certainly not by the 2% p.a. that some delusional folks out there claim.

      1. Thanks BigErn for the response and the detailed analysis I do really appreciate the effort you spend on the SWR series.

  18. Thank you for discussing the elusive “gold” investment temptation that ALWAYS rears its head with investors. the hesitation in each of the comments is enough for me to move on from gold/silver consideration. The same answer/summary always bubbles up despite the various ways and models one slices and dices gold or silver into their mix of investing. After a very lengthy and detailed analysis, there is no more of a compelling reason to add gold/silver than before. It is what it is. You MAY benefit from holding some if certain planets line up as you highlighted, you may lose if they do not. Warren Buffett quote is the net-net…he is where he is today without the temptation of investment into gold and bitcoin etc… He is confident and certain of his approach, a much better model of life to follow than any “study” with hypothetical scenarios that causes the very gold investors such hesitation. Including you. Thank you, as always for your detailed analysis! You are awesome!

  19. Real risk party strategies call for a dynamic allocation not a static one. To make it static is to lose out on one of its biggest advantages

    1. Never claimed anything different. I merely said that the AWP has some of the same appeal as a risk parity approach.

      But as I said in one of the other comment: it all depends on the horizon at which you measure risk. The AWP is very close to Risk Parity portfolio if you take the very long term risk measures.

      Also, I disagree with your claim the “the biggest advantage” of risk parity comes from tactical allocation. My experience from running these kinds of portfolios (10+ years) is that you get more than half the mileage merely from the strategic (long-term) weights and less than half the mileage from the tactical. I’m not saying that tactical is unimportant, it will make you alot of money extra, but the strategic shift toward risk parity is hugely important.

      1. Well, I said one of its biggest advantages, but ok

        The AWP is an oversimplification of the risk party strategy. It came about as Ray Dalio’s answer to the question: IF you had to pick one long term fixed allocation, what would it be? (my paraphrasing)

        It’s an artificially constrained question. Yet people read it as, this is how Ray Dalio would invest. And he’s a multi-billionaire. And therefore, I should follow suit.

        1. AWP is an oversimplification? You’re being diplomatic here. I’d call it a bastardization. It’s like saying that if you know that “a car has an engine and four wheels” that’s the super-secret formula for building cars that Mercedes-Benz (or BMW, or any other car maker you like to use) don’t want you to know. It takes a lot more than that to build the world’s best cars and it takes a lot more than the Tony-Robbins-AWP to run a successful hedge fund.

          Also: IF I had to pick one single static AA, I’d indeed pick something close to AWP, maybe with some slight leverage to overcome the low expected returns of the commodity portion.

  20. If gold cannot be owned before 1978, I am still confused how the simulations before that have any meaning? Over the big chunk of your backtests(~40 years), The gold price were fixed(brenton woods).It would have been great if you had shown the simulation after gold ownership was legalized and dollar was free floating.

    1. 1929-1932 bear market: gold was free floating
      1974 onward: gold was floating.
      So, gold helped you in the two worst bear markets from a SoRR perspective.

      But I agree that the fixed gold price (largely fixed, only adjusted every once in a while) during the 40 years in between. It was during a time when gold wasn’t needed.

  21. I’m a fan of some gold but not 15% or 25% as a fixed allocation. Presently I own about 9%, which is up from my usual 5%. I don’t just hold it however, I use it to sell high when the market goes low, and use the proceeds to live on, or buy some other asset low when their price is low. Looking at the market, stocks are way over priced based on historical mean trend line comps. From my perspective this quite a bit of this price acceleration is due to 30 years of financial engineering and not improved productivity in the equity. This therefore is price based on asset “inflation” and not on an increase the underlying value of a company. Further I think since many assets are now welded together as part of passive investment funds, their individual price discovery and risk analysis is impaired. Every month cash flows into funds and assets are purchased based largely on their inclusion in the index with no real understanding of their underlying value, so there is unrecognized systemic risk and price inflation based on automatic zombie purchasing. So in my opinion a 60% stock allocation in index funds carries a higher risk than is understood, and the higher the concentration of stocks the higher the greater the unrecognized risk. Gold is an uncorrelated asset to stocks, so unloading some stock concentration to gold improves portfolio diversity. In addition gold pays zero percent return. It can have asset price inflation or deflation but has no return. Bonds presently yield a slightly negative to zero real return when inflation adjusted depending on the duration, and Jap bonds or EU bonds yield dramatic negative returns. So would you rather own something that pays zero or something that pays negative? Gold and bonds are also uncorrelated and owning both improves portfolio diversity from a bond perspective as well.

    Improved portfolio diversity can improve portfolio yield by as much as a couple percent over the long term, so that is an aspect of gold ownership not to be ignored. I think its the added diversity that causes the improved WR in the case of a reduced equity concentration in the above tables. The Dalio portfolio has a component of commodities which are an inflation hedge so that’s part of that portfolio’s long term risk management. Gold in that portfolio I think must be viewed as part of the inflation protection and not as a separate part of the portfolio, like you may own 2 year and 30 year bonds in some mix as part of the fixed income aspect of a portfolio. I think given the fact the market is at about 120% of its historical mean growth the upside is much more limited than the down side since the market is much more likely to mean revert than double. In that case a little extra gold IMHO is a useful hedge to the probabilities. I owned gold which I accumulated cheaply, and in 2008 and found it useful to buffer my equity losses. I sold gold high and bought equities near the low and rode the asset inflation back up the mountain. When gold got cheap again I sold some equities high and bought a little more gold on the cheap. I don’t believe much in the buy and hold fixed asset allocation strategy anymore where you just stand on the train tracks and let the train run you over with the ridiculous notion you have plenty of time to recover. The Nikkei 225 got run over by the train in 1990 and never recovered. We presently hold more debt with lower quality collateral than ever before in 5000 years of recorded financial history, what could possibly go wrong? I think we are in a period of inflation acceleration as well, so I bought some commodities like oil and food as well.

    Fidelity allows some trades especially on ETF’s for free so I trade these in one of my Roth’s and can bulk up or reduce positions both commission free and tax free.

    1. All very good points. Just the plain example where I added gold by removing equities, the best-looking allocation was either 10 or 15%. So, I wouldn’t quibble over 9% or 10%. The gold allocation has to be high enough to actually matter if there’s a bear market but low enough to not drag down our performance when there’s no recession.

      Of course, the holy grail would be a dynamic allocation. Keep 5% when risk is low and raise to 9-10% when risk rises. I most definely like that idea. But the devil is in the details. What are the cutoffs for cheap vs. expensive?

      1. I’d just link it to the deviation of the S&P its the long term mean. Sell a little stock high and buy some gold relatively low. Something like another 2% gold for every 25% deviation from the mean. Another thing is to buy some HYG as S&P rises you still get high S&P correlation with a reduced portfolio vol. As the index diverges the probable upside (where the S&P pays) decreases and the downside (where the gold and bonds protects) expands.

        1. I guessed that. The problem is that there’s no long-term mean. Gold and SPX have different long-term grwoth rates, so the ratio will have a time-trend.

          So, for example if I look at the SPX/Gold ratio just from 2005 then the SPX seems expensive relative to Gold.
          But if I look at the very long-term trend (150 years!) of the SPX/Gold ratio and take out the exponential trend, then SPX is cheap relative to Gold.
          So, I definitely like this “valuation approach” because that’s how I’ve operated my entire life. But pinning down the exact numbers is not that trivial! 🙂

  22. Big ERN did you just save the 4% “rule” with gold?? Great article, like other have noted, I wonder if the hedge against sequence of return risk could be improved using a glide path approach. After 10-20 years into retirement, is it really necessary to still have a 15% gold allocation? Perhaps I’ll play around with your spreadsheet to try and find out. Cheers!

    1. Very good point! Just like with the bond GP, you get the best out of both worlds: short-term hedge against SoRR and then higher long-term expected returns.
      I haven’t done the calculations (yet) but I’m 99.99% they work out just as with the bond GP.
      Again, it’s not a panacea, but it will slightly improve the SWR! 🙂

  23. Herr ERN, I was also looking forward for your take on gold, and sure you delivered again. Thanks for putting this together. After I found out about that Permanent Portfolio I got curious and some time ago I found an interesting study from a blogger who seems to be the spanish ERN – his approach is also very technical and full of in-depth analysis. He has compared all those fancy portfolios. Maybe try google translator and take a look to have some fun, it is pure money nerdery:

    1. Yeah, very interesting.
      I don’t trust any of the SWR calclations, though because they seem to be all based on portfoliocharts, portfoliovisualizer data. That all starts in 1970 and can’t simulate any really bad sequence risk event yet.

      1. What would you think of using portfoliocharts but substituting Japan stocks for U.S.? They’ve had a pretty bad time over the past decades, though I don’t know how they compare to the 1930s.

        1. I wouldn’t trust Portfoliocharts due to the short return history (only since 1970), so you’d miss the really bad retirement cohorts.
          Also, not sure about Japanese stocks… U.S. is the growth engine of the world.

          1. Right, I’m not going to use portcharts withdrawal rates or invest a lot in Japan. But Japan has had some horrible decades since 1970. If we’re worried that the U.S. might do as badly as Japan has, we could substitute Japan for U.S. stocks and see how bad it gets.

            But is that really close to a worst case, or are there periods in the past 150 years when U.S. portfolios did even worse than that?

            1. Ah, sorry, my misunderstanding.
              Yeah, that might be a great idea as a worst-case scenario, to use Japanese equities instead of US.
              Will have to think about how to implement that… But thanks for the suggestions!

  24. I understand why you may hesitate with a gold allocation despite your supporting evidence! I feel the same. But here’s another way to look at it.

    If 4.00% is the maximum achievable requiring 15% gold, your analysis suggests you can achieve 99% of the maximum benefit (3.96%) with just 10% gold. Holding the maximum 15% gold only gets you another 0.04% SWR.

    Putting that into figures, say you have a $1m portfolio 5% gold adds $1,900 to safe annual withdrawal rate $37,700 (5.3% more income), and 10% gold adds $3,800 to safe annual withdrawal rate $39,600 (10.6% more income).

    This means for 5% and 10% (and I suspect points in between) there is a neat result that the amount held in gold allows for a roughly proportional increase in disposable income. Nice. That makes a small allocation to gold a lot easier to accept.

    1. Just go to and plug in ^GPSC in the chart feature and then add GLD as a second line on the same graph and see how a little dab of gold responds to a 50% down turn circa 2008. That’s what convinced me. By the way my AUM is friends with Buffet and Buffet has owned gold in the past

  25. This is a useful post but you’ve missed more than you’ve understood about how the Golden Butterfly and gold-heavy portfolios in general work for retirees and in general. You provided one quick link to the Portfolio Charts site but unless you take a few hours to use the tools on that site and to read Tyler’s commentary about specific asset classes and portfolio construction you miss a level of analytic horsepower that simply isn’t available anywhere else on the web.

    Your preferred equity-heavy portfolios will often have huge draw-downs in market collapses that very few investors are able to actually stay the course through. That’s why the “ulcer index” supplied with all of the portfolios on the site is so useful. Ditto not just the safe but the perpetual withdrawal rates – which for the GB are 6.5% and 5.3% respectively.

    And the details of portfolio construction matter – especially in market meltdowns. A 100% Treasury barbell as the GB and PP specify will save you (as they did in 2008) while a Total Bond index proxy will kill you.

    Here are details on the GB:

    Also of interest to anyone open enough to consider including gold (i.e. non-Bogleheads) is this article by Steven Evanson, by no means a gold bug (neither am I!) who heads up one of the most highly-regarded FA firms specializing in low-cost access to DFA funds. He goes into a lot of history for the asset that isn’t easily available elsewhere – and ends up pretty much where you do at 15-20% gold recommended, all taken out of the equity allocation.

    Play around with the tools on Portfolio Charts and you’ll have a hard time coming up with any allocation well-suited for retirement that doesn’t include some gold. The one exception would be the Larry Swedroe portfolio, which is another sophisticated risk parity vehicle.

    1. Thanks for the feedback. I may very well have missed a lot about the GB, but nothing you write here tells me that I have missed anything important.

      Above all is the fact that I don’t consider a safe withdrawal analysis starting only in 1972 a proper and robust analysis. As I showed with my analysis, the GB is an inferior strategy when looked at over longer horizons and including the late 60s.
      The charts on that site are all really nice, but it’s all garbage in garbage out if you start the analysis in 1972.

      Again: I’m not trashing gold. I’m merely saying that if you want to do gold, just do it with a stock/bond/gold = 60/25/15 portfolio, but ignore the nonsense about small-cap-value. That’s all voodoo-finance.

      1. You’re still missing the point about gold because of the time frame you’re using. Perhaps this comment from the creator of the Golden Butterfly portfolio will help:

        “Everyone is entitled to their own investing opinions, but my biggest factual quibble is that ERN strangely makes no mention of the gold standard and how price fixing completely changes the nature of gold before and after 1971. I personally think it’s crazy to argue that portfolios today should be judged based on gold’s performance as a hard currency. It’s no different than if VTI switched overnight from a stock fund to a stable value fund where every share is always worth $1. Regardless of the name, would anyone honestly argue that it is the same investment?”

        As for small cap value, I understand your argument as it’s an old one on Bogleheads and based on the belief that the SCV premium has disappeared for good. Maybe so, maybe not, but to cavalierly dismiss it as “voodoo-finance” when Nobel-prize winning economists and a fleet of elite firms (not to mention numerous highly-successful portfolios – see the Merriman Ultimate on Portfolio Charts for example) still employ it doesn’t serve your readers well.

        1. No, the only person missing anything is you.

          “ERN strangely makes no mention of the gold standard”

          I don’t know why Mr. GB gets so hung up on one little detail (not mentioning the GS by name) in the section that is in support of gold, i.e., in support of one aspect of the GB portfolio. Did he also find some punctuation errors? Will that invalidate my analysis? The gold standard is a red herring. The maker of the GB Portfolio and I seem to agree that gold can be a hedge against bad times. I confirmed that in the 1970s and fully agree with the GB findings. I always caution against model risk and the possibility that future returns may look different because today’s returns may look different from past return patterns. But it’s good to know that gold “worked” in the Great Depression (demand shock with gold standard) during the 1970s (supply shock without a gold standard) and during the Great Recession (demand shock, no gold standard).
          My disagreement with the GB Portfolio has nothing to do with Gold but with the low equity weight. 40% equities plus 60% assets with low expected returns (bonds and gold) will likely not survive a lengthy retirement.
          My disagreement with the GP Portfolio has everything to do with the following flaw: In order to overcome that low return problem, it heavily relies on the SCV Premium to persist.

          You see, if Mr. GB had done a better job he would not just have dumped a lot of pretty pictures on the page but would have also performed an “attribution analysis”, i.e., when proposing so many different changes in the portfolio going from a 60/40 to a GB, what portfolio alteration is responsible for how much of the change in the outcome? That’s what I did with my post. And it confirms what I had suspected: All of the outperformance of the GB is due to SCV. Your simple 60/25/15 portfolio would have created better results than the GB without SCV. Hence my lukewarm opinion about the GB Portfolio.

          As for small-cap value, I understand your argument as it’s an old one on Bogleheads and based on the belief that the SCV premium has disappeared for good. Maybe so, maybe not, but to cavalierly dismiss it as “voodoo-finance”

          Remember: Fama got the Nobel Prize together with Rober Shiller (“Prof. Efficient Markets“), so the name dropping and insulting the Bogleheads doesn’t work here. There are just as many smart and educated people out there who believe the SCV premium has run its course and it’s now arb’ed away.
          Also, Fama didn’t get the Prize for the Fama-French approach (not that you ever claimed that, but just for the record)
          Also, and this is a subtlety that is lost on many internet clowns and trolls out there: The impact of the Fama-French approach in Finance (academia and practice) has less to do with the (now dwindling) alpha in the SMB and HML factors. It has everything to do with the fact that adding these factors (and some more, like momentum, betting-against-beta, etc.) helps explain the cross-sectional variation in returns much better than a market beta alone. So, the whole Fama-French approach doesn’t rely on the SMB/HML premia being positive. It’s a “beta” thing! I’ve run a lot of factor models, more than you and Mr. GB combined!
          I’ve had to “explain” that to too many uneducated clowns out there who always make this idiotic strawman argument: “so you say that if the SMB/HML premium goes away, this will invalidate all of Fama-French analysis?”

  26. “We show that gold may be a good inflation hedge over many centuries but a poor inflation hedge for horizons up to 20 years (the relevant horizon for most investors). We argue that gold is also an unreliable currency hedge. Even in periods of hyperinflation, gold may not keep its real value. We also argue that gold should not be counted on as a safe haven in times of extreme stress, such as war.” — The Golden Dilemma (2012) Claude Erb & Campbell Harvey

    1. Gold might be a poor solution to their particular issues that they studied. But I showed that gold did OK in the context of retirement withdrawals.
      Unless someone can show me that I made a mistake in my calculations, I’d still trust my own calculations over someone else studying a completely different problem and concluding that gold wasn’t a good hedge in that environment.

  27. Unfortunately, one gets paid almost nothing to write puts on gold. Near the money IAU puts with 11 months duration would yield a little over 2.3% best case. This begs the question- what can gold do that holding cash can’t?

    1. Don’t use the IAU. The price of the underlying is ~$15.50 and the option strikes go in steps of $1.00, that’s a huge gap.
      If you check the futures options (GC contract) you’ll see that the ATM options have a time value of around 5% p.a. for December 2020. That’s in the same ballpark as SPX ATM options in Dec 2020, even though gold currently has a slightly lower realized volatility.

      Also, don’t make the mistake of comparing the option yield to the cash yield. Your margin cash can still be invested in fixed income and earn cash yields and your option positions will earn a return ON TOP of that.

  28. Hi ERN, gold has performed poorly during this downturn. I am very frustrated. I have invested on it for the last 3 years and now when it was the time for it to do its magic… nothing happened. 🙁 sorry I had to vent

    1. That’s another indicator that this is a crisis like no other. Now, admittedly, gold held up better than stocks, but it’s overall a disappointment as a diversifier. US government bonds were the only safe haven this time.

  29. i don’t get the same result with the current version of the spreadsheet for 60 stocks / 25 bond / 15 gold (those are the only cells i changed). did i do something wrong?

  30. I sincerely think this is the best series on withdrawal rates out there.

    Is there any way for us to find out the cagr, max drawdowns, and volatility for the gold inclusive portfolios referenced above?

    1. I figured it out. I noticed that different allocations performed best under different cape regimes.

      Assuming a final value of 100% of portfolio, 60 year time frame, and stock/bond growth assumptions you made above:

      90 stock/10 bond exceeds 3.5% withdrawal rate if cape30

      Is it fair to assume that by switching in between these portfolios as the CAPE changes, that I’ll get the higher swr of 3.5% as long as cape leaves the 20->30 range some times or is this data mining because cape> 30 is much rarer?

    2. If you go to the SWR Google Sheet (Part 28) you can simulate your own portfolio and then read off the portfolio return series in the appropriate tab. Then simply calculate all the stats you need from there…

  31. I find it interesting that you said that you didn’t see a recession around the corner only four months ago. Truly, no one knows what the future holds.

    Good work! I agree that a 10-15% allocation to gold would undeniably have helped retirees of the past. I’m considering an allocation to gold during retirement myself.

  32. The mark of a good article is that its comments are still going strong 4 months later. Thanks very much for a great piece.

    I would just make one comment regarding Gold doing its job recently as I see a lot of comment about a disappointing performance. I’m a (6’4″) UK investor and for me Gold has definitely done its job when compared to the matching allocation I have in UK Gilts (that’s Ishares Gold ETC SGLN and Vanguard UK Gilts tracker VGOV). Perhaps there was a flight to cash and specifically the dollar but whatever the reason I’ve just cashed in my insurance policy for this crash.

    Also my 65/17.5/17.5 (rebalanced) has come out significantly ahead of a 65/35 Vanguard Lifestrategy benchmark.

    1. Thanks!
      Yes, that was a smart move! The gold price rallied in USD, so it’s not guaranteed that it was good insurance in all other currencies, but it looks like it worked out well for you in GBP!
      Good luck! 🙂

  33. Hi Mr. ERN,

    Great article !
    I have a bias towards gold ( stands at circa 15% to 20% of my asset allocation), hence your post confirmed that my allocation to gold is resonable and has historical support in terms of performance ans risk mitigation role 🙂

    I was wondering if you may take into consideration to run some tests with a different asset, i.e. the Managed futures. It is uncorrelated to stocks and bonds, actively managed and have done well in times of stress/crises and rely on momentum and carry strategies.

    Managed futures may have additiona potential along gold to mitigate even further the SWR risks.

    Thank you,
    Best regards,
    Virgil Bucur

    1. I don’t have a long enough return history for MFs. They did very well in 2008/9 but had a spotty record since. Not sure how they did in 2020. It wasn’t a long enough drawdown (yet!) so I wouldn’t be surprised if some of the momentum-based strategies got hammered in this.

  34. Hi Ern,

    Given the events of the past week, looking at a more recent period, January 3, 1968, which starts with the chaotic social unrest 1968 year in USA, to today, June 3, 2020:

    Per Jan 3 1968 gold price = 35.16.

    Per daily inflation calculator a cpi factor = 7.48 for Jan 3 1968 to June 3 2020.

    Thus Jan 3 1968 gold price = 262.9968 today’s dollars. (35.16 x 7.48)

    June 3 2020 midday gold price = 1,700 dollars.

    1,700 / 262.9968 = real return factor of 6.4640 for this period.

    6.4640 ^ (1 / 52.4167years) = an average compounded annual real return factor of 1.0362.

    Thus gold compounded annual real return for Jan 3 1968 to June 3 2020 = approx 3.62%.

    Per dqydj calculator 10-yr treasury real return for this period (actually May 1968 to May 2020) = 2.592%.

    Given stocks and bonds high valuations as of today June 3 2020, these real returns since 1968 would seem to add further support to your analysis above to definitely have an allocation to gold in a retirement portfolio.


  35. Oh how I wish you had compared the 65-25-10 portfolio to a 65-35 portfolio, instead of the 75-25 that you did. Without that comparison, you really can’t tell whether the improved SWR is caused by the gold or by the reduction in stocks!

  36. Hi Ern, when I review the safe withdrawal rates at they are much better than you are showing here for the Permanent and Golden Butterfly portfolios. I’m trying to understand the differences. I noticed your last chart shows 1920’s-1970’s and his site has 1970-2019. Do you have data on those portfolios for the last 50 years so I can compare. I’m trying to evaluate these vs the classic 60/40. Thanks.

    1. The shorter horizon makes ALL the difference. portfoliocharts cuts out the really bad cohorts (1929, 1965, 1966, 1968).
      You can access my return data in the Google Sheet I use for my sims (Part 28). They are monthly returns, both nominal and (more importantly) adjusted for CPI inflation

  37. Hi Ern.

    I cannot understand the last part on the last table of the article (4% failure….). Especially the percentage on the drawdowns. Can you please explain it?

    Regarding the “exotic” portfolios, they were created to lower volatility and cope emotionally with big drawdowns. Do you mean that they will not work even for capital accumulation then?


    1. 1: these are failure rates in historical simulations. These are not drawdown %.

      2: they lower the risk compared to a 100% equity portfolio. Not necessarily a 60/40 portfolio. I would not use those exotic strategies. Neither in the accumulation nor decumulation phase.

      1. Thanks.

        I am still not clear on number 1. What does it means for example, that with a drawdown from 0-10% I have a failure rate probability of 12.59%?

        1. OK, gotcha. Conditional on the S&P 500 being between 0 and 10% below the all-time-high, you had a specific failure rate. It’s a way to gauge how the failure rates vary with different equity valuations. If the market is down 30% already, you don’t have to worry too much about the 4% Rule at that point.

  38. Consistent with ANDREW’s (not me!) point above, and your comment that real bond yields today are beyond low, it seems to me that it’s not just that monetary policy was different before 1920. Since “Helicopter money” would seem to ensure that we will never again have sustained deflation in this country (as in the Great Depression), that one assumption would seem to argue for much less in bonds and much more in gold.

    Using your Google Sheet with only post-1950 data seems to show that the optimal allocation for highest SWR is something like 60% stocks, only 5% bonds and 35% gold!

    This shows a failsafe SWR of 5.22% with a zero final target after 30 years. More interesting, even with a 50% final target after 30 years, this allocation shows a 4.50% failsafe SWR!

    If you believe sustained deflation is off the table, it would seem that with a huge gold allocation a significantly higher SWR is possible.

    Am I missing something? Did I do “unfair” data mining? Given the zero interest rate environment we are in, this doesn’t seem like a completely crazy allocation, and perhaps even less crazy if one used a glidepath to move money from cash/bonds to stocks+gold over a small number of years.

    And if going to 35% gold seems “crazy” high, going straight to 20% doesn’t – especially since your work including the entire time period supports a 10%-15% gold allocation already.

    What do you think? Can you do glidepath analysis incorporating gold and starting post Great Depression? Should you? If not, why not? Are the answers radically different for FIRE 60 year retirements vs conventional 30 year ones?

      1. Fair point – my concern as well, which is why I asked. And of course no past results are guaranteed into the future. The ~60% stocks number as close to optimal seems to be validated across all three of the 70, 95 and 150 year timeframes, so that is very comforting and while it too “may not work going forward”, it seems a pretty good bet.

        But why is there any good reason to believe that 10 year Treasuries will “work” at this point, given that the < 1% nominal yield is negative in real terms?

        So you've advocated 60/40 with a glidepath upward, and you've advocated 60/25/15 (or 60/30/10) while acknowledging that you don't actually own gold. Separately I believe you noted in one post/comment that seemed almost offhand that you don't actually own bonds either. Real estate clearly is part of your bond/gold "replacement", but it's also clearly not all of it.

        What *is* your current allocation? And do you think bonds are actually safer to hold than gold for the next 5-10-15 years?

        Inquiring minds want to know! 🙂

  39. You still feel that 15% GLD or IAU will help offset equity volatility and thus improve SWR? I’m currently at 7% GLD trying to work toward 15% over time. I’ve read up to 20% other places but I don’t feel comfortable going that high.

  40. It seems the COVID demand shock has suddenly pivoted into a minor supply shock here in the fall of 2021, and the fed is about to rapidly pivot from stimulative to contractive monetary policy. Long duration bonds are at great risk, and stock markets with PE’s in the 30’s based on the TINA rationale could get adjusted. That’s what brought me back to this article. Everyone’s talking inflation, but (1) they’re talking TTM numbers, not a 2-year average that bridges the odd things that went on in 2020 and delivers a 3.3% average annual change in CPI, and (2) the Fed has a few trillion reasons in its pocket for why inflation’s not going to be an issue like it was in the 70s.

    Meanwhile, the 10y treasury yield on 10/12/21 hit the exact same 1.59% level it was at on 6/2/21 — the “top” before GLD fell 7.9%. Now fossil fuels are the trendy place to be. This is a reminder that gold isn’t “correlated” or “uncorrelated” with anything except by accident.

    The point is: I’m thinking one has to define exactly what scenarios are worth hedging against. IMO, the high inflation scenario of the 1970s is off the table due to the Fed’s balance sheet and the broad license it’s been granted to swing it around. Similarly, there is precisely zero chance that we’ll again get off the gold standard, or go back onto it, in the next 5-6 years. So I would take the late 1960s, early 1970s out of the failure rate analysis.

    I DO think there’s a risk of an asset bubble popping and causing a demand-side recession like 2000 or 2008, in stocks, bonds, housing, derivatives, commodities, or crypto. I DO worry about a major geopolitical event such as China invading Taiwan. I DO think there’s a risk of a flash crash like 1987, and I DO think there’s a risk of a “lost decade” or two like Japan experienced. Both bonds and gold appear nearly useless if we exclude the 1970s inflation episode and narrow our concerns to these possibilities. Yet a 100% stocks portfolio would be vulnerable to all the things on the worry list.

    Hedging a stock-heavy portfolio with options still seems like the way to go in these unprecedented conditions.

    1. The fed has signaled that rate higkes may start next year, true. But they will be gradual and they are already priced in.

      Like you’I’m worried about a China/Taiwan conflict. Watch out, everybody, once the Beijing Olympics are over, it might be “no more Mr. Nice Chairman Xi”

      In that sense, I’d sincerely hope that the real estate bubble in China pops really soon, so the commies are too busy with internal issues and lose a bit of their appetite.

      About gold: Too many uncertainties. And too many ways the future crisis might be different from the previous ones. Maybe that’s exactly my reason why I haven’t stocked up on gold yet. 🙂

  41. I ran some numbers using your spreadsheet for a portfolio I’ve been theorizing, based on the idea of the Golden Butterfly portfolio, but adding additional equities to increase average returns.


    50% Stocks (30% small cap value)
    25% Bonds
    5% Foreign Stocks
    20% Gold

    Retirement Horizon: 360
    Final Value Target: 25%

    This results in upwards of a 5% SWR since 1926 & 1950.

    1. Small Cap Value hasn’t worked very well for the last few decades. I know that some people (Merriman, etc.) swear that SCV will consistently outperform the S&P500 by 1-2%. But there is no free lunch. The SCV party will not last. I wouldn’t bet my retirement on past outperformance.

  42. ERN, I used your SWR toolkit (awesome spreadsheet btw) for a 60/20/15/5 Stocks/Bonds /Gold/Cash and got similar results. However I noticed you used a 360 month retirement. Making it 720 months (“true early retiree”) I get failsafes for the 20s and 30s (Great Depression) closer to 3.5%. Is there really nothing in asset allocation space that an early retiree can do to survive a Great Depression-like event without going to the 3.5 WR? Thank you for the SWR series – it is truly great work.

  43. The gold can be a good hedge but not always. Betting big on gold is like betting that we will always be having high inflation and economic turmoil.

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