Precious metals exposure should comprise up to 25% of investor equity portfolios, according to new academic research. Allocating 25% of the portfolio to precious metals equities increases annual returns by 1.65 (percentage points) and reduces the portfolios standard deviation by 1.86%, according to a study based on the research. Smaller allocations to precious metals improve portfolio performance, but to a lesser degree.
The study calls a 25% allocation reasonable. It is unlikely that equity fund managers would allocate more than 25% of their equity portfolio to precious metals, or any other single alternative investment; therefore the largest allocation considered is 25% even though research suggests a heavier allocation may be more advantageous, the study states.
The study Can Precious Metals Make Your Portfolio Shine? examined daily returns for the U.S. equity market and six precious metals indexes from Jan. 17, 1973, through Dec. 31, 2006.
Gerald R. Jensen, professor of finance at Northern Illinois University, DeKalb, and a co-author of the study, said in an interview, Historically, this would not be a good time to be holding precious metals because the Fed is in an expansion mode, that is, lowering interest rates. Historically, precious metals have been most helpful in portfolios in periods of restrictive monetary policy, not when we are in periods of expansion, Mr. Jensen said. But he said precious metals companies make a good long-term strategic investment.
Other authors of the study are C. Mitchell Conover, associate professor of finance, Robins School of Business, University of Richmond, Virginia; and Robert R. Johnson, deputy CEO and managing director, education division, CFA Institute; and Jeffrey M. Mercer, associate professor of finance, Rawls College of Business, Texas Tech University, Lubbock.
The study is being reviewed for publication in the Journal of Alternative Investments, Mr. Jensen said.