It is possible to get your growth and stability (think a beta lower than 1.0, which entails less correlation to the TSX Index) in the same portfolio. Undoubtedly, you’ve probably heard of the so-called “barbell portfolio,” which aims to find the right balance between the high-growth names with higher betas (that means higher volatility) and the steady Eddie plays. On one side of the barbell, you might have some of the fast-rising AI growth plays that are more than worth adding after the latest slump in mega-cap tech stocks.
And, on the other side, perhaps there’s room for gold (maybe even silver for added torque), bond funds, guaranteed investment certificates (GICs), defensive dividend stocks, real estate investment trusts (REITs), money market funds, and, of course, higher-yielding index funds, and low-volatility and specialty income ETFs. Now, that’s a lot to consider on the risk-off part of the barbell portfolio.
And while I am a bigger fan of money market funds than GICs, given the flexibility to move funds out of the funds and into stocks should the broad markets suddenly crash unexpectedly, I do think that every investor should understand the magnitude of risks they’d be willing to take in the risk-off side of the portfolio. If you’re going to take on more risk for more growth with the risk-on side, your risk-off side should live up to the promise!
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Gold looks riskier, but is it a buy?
Of late, gold might be riskier than many would give it credit for. Depending on the strength of your stomach, it might be more of a risk-on asset after the plunge it put investors through at the start of the year. Given retail investor interest in gold and other metals, I’d argue that gold is a dynamic asset that could be considered both a risk-on and risk-off asset at the same time, depending on the environment.
For now, I’d be more inclined to stash it in the risk-on part of the barbell, especially if you need the risk-off side to be solid in times of turmoil. The Sprott Physical Gold Trust (TSX:PHYS) is my favourite way to bet on gold at a nice discount. It’s a closed-ended fund and one that’s currently going for a 2.2% discount to net asset value (NAV).
What’s most enticing about PHYS is that it’s exposed to the actual physical metal. With a 0.40% management expense ratio (MER), the CEF is also competitively priced for investors ready to add to their gold exposure on the risk-on side of the portfolio.
I think gold’s risk-on feel is a reason why many have shied away from the asset. As the debasement trade and central bank buying continue, though, my bet is that gold might outpace the stock market from here.
What about the risk-off portion?
Arguably, long-duration bonds are choppier and riskier, given the risk of losses if rates were to march higher again. Given the duration and rate risk, I’d argue that many may underestimate the risks associated with bonds, especially given the limited upside potential if rates do move lower compared to the runway if rates move higher. For safe investors, shorter-duration bonds might be a better bet.
And money market funds that invest in commercial paper and Treasury Bills (T-Bills) might be the ultimate risk-off asset for those who are willing to settle for slightly less yield. Personally, I think money market funds are in a sweet spot between GICs and savings and shorter-duration bonds. The risk is low, and the yield is decent enough to keep up with inflation while ensuring one’s liquidity isn’t locked up for years.
The TD Cash Management ETF (TSX:TCSH) is a great ETF to buy to score a 2.8% yield or so (Bank of Canada decisions will move the needle on that yield) while ensuring minimal (even microscopic) risk. The price of TCSH tends to reset back to or within a few pennies of $50.00 every month. With a better yield than savings accounts, more wiggle room versus GICs, and far less risk than bond funds, the TCSH and its like are fantastic options for investors who need a parking space for cash in the risk-off side of the portfolio.
