Does Gold Still Diversify?

Gold is used by many investors to diversify their portfolio and protect in a sell-off. But does that theory still hold true? 

Valerio Baselli 4 November, 2020 | 9:57AM

Gold

The ABC of finance says that to lower the overall risk of your portfolio you need to diversify your investments. This basically means having assets that move independently of each other.

Diversification is not limited to the division between equity and bond. Equity, for example, is a very broad asset class, made up of investments that are also quite different from each other. Sub-segments can be classified according to the market capitalisation of the company (large-cap, mid-cap, and small-cap), the reference market (developed countries or emerging markets), and the economic sector in which the company operates (industrial, financial, energy, and so on).

Diversification alone isn't enough. It is important to have an idea of how the various economic sectors represented by one’s equity exposure influence each other in order to avoid investing in instruments that are subject to very similar movements.

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About Author

Valerio Baselli

Valerio Baselli  is an Editor at Morningstar Italy.

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