My Gold Investment Has Finally Come Good

Editor's Views: The problem with gold as an insurance policy, how investors should trade the coronavirus epidemic, and why a 10% dividend yield is often too good to be true

Holly Black 7 February, 2020 | 11:35AM
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As the spread of the coronavirus picks up its pace, it’s only natural that investors start wondering what that means for their portfolio. There are two main ways that people react to a market shock such as this: panic or profit.

Panicked investors might sell-up and run for the hills, get their money out of the market, even if it means accepting a loss. At least they can store what’s left under a mattress until the crisis passes.

Profiteers, meanwhile, would be on the lookout for opportunities, potentially adding more money to their portfolio while the market falls in the belief it will rebound – even if it takes a while.

Ultimately, though, we don’t know how this outbreak will play out. While we can look at all the charts that show previous epidemics have historically had a short-term impact, we all know what the investment industry’s motto is: past performance is no guarantee of future returns.

So, really, neither reaction is wrong; in the end, it’s about what makes you feel most comfortable. Your investments should never be causing you sleepless nights. And if you can’t decide, I often find it’s best just to not look at your portfolio.

Stick or Twist?

When I first set up a stocks and shares Isa, around seven or eight years ago, I made the somewhat misguided decision to plonk a gold ETF into a portfolio I had otherwise thought long and hard about.

I have no idea what the gold price was at the time but I know I had the vague notion I was supposed to have some gold in the mix; that it would provide protection for me when times got rough.

Well, I must say, the gold ETF has been less an insurance policy and more a liability. Less a lustrous yellow metal and more of an annoying red blip in a list of lovely black.

So, here’s how I know that investors must be worried at the moment: for the first time ever, my gold ETF is in profit.

Granted, I don’t look at my portfolio often – probably every three or four months – so it could have been sitting in positive territory for a while, but it was really quite the shock when I logged in to my account for a quick check-in this week. It's suddenly in the black to the tune of about 20%. 

So now I have a dilemma: do I continue to hold the gold, vindicated that it is finally doing its job, or do I sell out now I’m finally in profit? Morningstar analysts say there's further to go - I'm tempted to cut and run. 

Dividend Traps

At Morningstar HQ we love a dividend as much as the next investor. What we don’t love, however, is a dividend trap. No one wants to invest in a company expecting a fat, juicy dividend only to have it cut or, worse still, scrapped altogether.

So, we’re all about the word “sustainable” when we’re talking about income stocks. That’s why you won’t find Royal Mail in our list of top dividend-paying FTSE stocks. The yield on the shares reached a meaty 12% this week after a not-so-impressive trading update, and while some investors might want to take a punt in the hope of reaping the rewards, we’d argue it looks like a red flag.

Because dividends work like most other things in life: the more risk you’re taking, the more compensation you’re paid for doing so. It’s true of loan companies and mortgage providers, who save the best rates for the safest-looking customers; in bond markets, where the governments and companies with the healthiest balance sheets can pay lower coupons; and in horse-racing, where the outsider pays out the big bucks if you win. 

While I don't mind taking a punt on some things in life - an experimental crisp flavour, perhaps, or a film that got terrible reviews - when it comes to my investments, I tend to pay attention to the red flags. 

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk