Somewhat related: useful diversification seems to be very difficult to achieve.
What asset classes exist which are not strongly correlated with stocks AND still produce worthwhile returns over the long term? I don’t think bonds are useful. Real Estate, perhaps?
If I had a good answer, I’d be using it…
You’re not going to like my answer but gold has actually outperformed the S&P over all of the last 10, 20, and 25 year periods. Over 30 year the S&P. But not by much. Those are total returns btw. Dividends reinvested.
Weird.
Even weirder is though that its biggest selling point, its historical lack of correlation to the S&P, (see 2008 as an illustrative year), to thus have some powder kept dry, so to speak, to buy with when a recession hits, seems less true than it used to be. But that may a recent years blip.
I am not advocating huge gold positions mind you, but I’ve long been a fan of the 5 to 10% allocation.
More deeply, what is a worthwhile return? And how much volatility and much real risk of loss are you willing to take in its pursuit?
Adding to it: not only what return is “worthwhile”, what would, to you, make diversification “useful”?
Different people really have different answers to both of those bits, based on temperament, mindset, near term anticipated events, income, and size of portfolio. And everything else follows.
In my case being retired I can’t earn my way back from losses, so the main reason I think about diversification from time to time is risk reduction.
I guess there is one thing about gold: no matter what happens in global politics, it is very unlikely to lose its perceived status as a valued asset in the forseeable future.
Out of curiousity: how do you hold your gold allocation? Physical metal in your possesion, stock or fund based on physical gold, or stock/fund based on gold production?
Maybe, but perceived status and selling price are not the same.
Yes, but the situation was very different five or ten years ago. The outperformance is very recent.
I am not advocating zero gold, mind you. But ten percent is about my upper limit. And gold has broken through that limit repeatedly in the last years, and right now I am still above my target.
One interesting article from the NYT (gift link, no preview, it’s about moral hazard and Wall St. always being saved by the Fed since Allan Greespan’s days. Thesis: This will not work forever, and we may be close to breaking down point).
I will argue the case that all those asset classes are positively correlated to the mother of all assets which is which is sentiment.
Positive sentiment seems to be the tide that lifts all boats.
The etf GLD.
It has outperformed the S&P in other periods too. And underperformed. 2000 to 2010 gold returned nearly threefold while the S&P with dividends reinvested was essentially zip. Basically reversed 2010 to 2021. Gold up 64% to S&P 485% And the last 5 years gold outperforms even an irrationally hot market.
Me too.
Interesting. Looking at the comparison graphs, it seems that GLD has shot up over the S&P rather suddenly since the start of 2025.
Of course, going back to the point @Al128 made: Do you want to buy something on the basis that it has recently outperformed? Or the contrary, perhaps?
I have always had something of an aversion to gold because it is not a ‘productive activity’: more a bet on future valuation. In other words: basically gambling. My engineer mentality, I guess..
Agreed.
If I buy a share of stock in a company, whether it be Amazon or Pfizer or Chevron, the value of that stock will go up or down based on the performance of that company.
If buy an ounce of gold, the value of that ounce will be whatever somebody is willing to pay me for it.
Now, I do own some gold, but very little, certainly a lot less than 10% of my portfolio.
In today’s world that seems like an almost cute belief! 
Seriously I tend to think of my small allocation in gold not as a bet but as a hedge on my bigger bets, a small insurance policy. Of course the some of the recent up is driven by bets, just as much as the equities side is.
Answering the question of
though … gold has not been strongly correlated with stocks and has worthwhile returns over the long term of one to two to even three decades.
The other asset class that has also hit both those marks over the past 20 plus years is indeed real estate, using REITs as the measure. And putting there is not chasing the current hot money.
So I read this article this morning, about making quant strategies available to smaller investors.
(hopefully a gift link)
It mentions that investors are worried about AI managing trading and how people are looking for an edge. It also mentions that people are using AI to digest earnings reports and filings, presumably to be the first out of the gate to trade on the info.
Now, I know there have been a few market upsets caused by algorithmic trading in the past, some going back decades.
Am I the only one who thinks we’re nearly certain to see an incident where all the AIs feed off of each other and cause some sort of calamity?
No, you’re not. AI will cause big trouble.
It may also do good on the long term, but only if it is well regulated internationally. And this regulation, I am afraid, will only come, if at all, after a big calamity.
I agree. Algorithmic trading on steroids gone nuclear. This may be the next major crash?
Good luck with that. As far as I can see the entire world economic and trade system is a house of cards that survives because enough people believe in it, or pretend to?
Somewhere underneath there has to be a ‘real’ layer where goods, services and materials are actually provided and transported to keep people alive and something passing for civilization working. But the markets are perhaps only loosely connected to that?
High-frequency trading (HFT) / algorithmic trading already uses AI (aka machine learning). It’s custom-built for the specific task.
This is a different flavor of AI than what is popularly called AI recently – LLMs. LLMs could be useful to HFT, but they run very slowly so not likely to add instability beyond what we have now.
I don’t think the arms race of purpose built AIs for HFT increases or decreases the flash crash risk. Tge same big players are playing. Just with more power on each side against each other. It’s interesting though to consider rival highly powered purpose built AI platforms trading in the same pool where they each have access to the same previous sets of patterns and are changing the patterns by their collective activity, each predicting the others’s next moves before they happen … where getting there a millisecond earlier or later means profit or loss.
How small retail investors think they can play in that pond amazes me.
Thinking on it … I suspect that it isn’t only the small retail investor who cannot swim in the pool - the more powerful purpose built AIs will be a higher and higher cost of admission to stay on par with the best capitalized players. Those firms stay even with each other, zero sum game, but those firms without that level of capital are going to get priced out of being able to afford the higher level tools.
I couldn’t get to the WSJ article but I’d expect that AI does the opposite of opening up quant trading to the masses; it will concentrate it more in the hands of the biggest wealthiest firms.
Does HFT have a significant impact on retail investors? Or are they mainly competing with each other? Are there two parallel competitions happening on the same field?
My limited understanding:
Clearly if the competing algorithms set off a flash crash it moves into our world.
Otherwise it just provides the liquidity and narrower bid ask spreads that helps us on the retail side, marginally. Of no real matter to us longer term hold folk.
My understanding is that the main effects of HFT as perceived by a retail investor is that if you place a limit order, “I.e. buy XXX at a price less than $YYY”, the order is more likely to be filled at a price closer to (but not over) the limit price because if HFT traders front-running the order.