Digital innovation has democratised access to financial information to the point where anyone with a smartphone, a few apps and real-time news and data feeds can be like a pro trader. But who wants to do that? And do you need to?

In the world of information flows, speed is barely an issue anymore. And the old hierarchies, where professionals with state of the art systems had priority access to breaking news, have been progressively dismantled.

For instance, a $500 smartphone with a 1.3 gigahertz processor is more than a thousand times faster than the Apollo guidance computer that sent astronauts to the moon nearly half a century ago. Its internal memory is 250,000 times bigger.

The upshot is that financial and other information comes at us faster and in greater volumes than ever. We no longer have to wait for the six o’clock TV news to know what happened in markets today. Our apps notify us in real time.

But amid this era of always-on news flow, the big question for most of us is not about our access to real-time information; it’s about whether we actually need to be so plugged in to have a successful investment experience.

Dealing with that question starts with reflecting how much of an investment “edge” you get by having access to information that is so freely available.

On that score, there’s an old concept in economics called the law of diminishing returns. It essentially says that adding more and more of one input, while keeping everything else constant, gives you progressively less bang for your buck.

At the industrial end of this technology arms race, you have the high frequency traders who spend a fortune on advanced communications infrastructure to try to take advantage of split second changes in millions of prices. On the evolutionary scale, these computer programs make smart phones look like ploughshares.

So against that background it’s not clear that adding the latest market-minder app to your iPhone is necessarily the path to investment success.

The second question to ask is what you are trying to achieve. Are you trying to “beat” the market by finding mistakes in prices and timing your entry and exit points? If so, and given the competition above, you might want to review your information budget.

The truth for most of us is that investment is not an end in itself, but a means to an end. We want to save for a house or put our children through school or look after aging parents or give ourselves a good chance of a comfortable retirement.

In this context, the most relevant information is about our own lives and circumstances. How much do we spend? How much can we save? What’s our risk appetite? What are our future needs? And how much of a cash buffer do we need?

This is the value an independent financial advisor can bring—not in trying to second-guess the market or using forecasts to gamble with your money—but in understanding the life situation of each person and what each of them needs.

Ultimately, markets are so competitive that we really are wasting our own precious resources by trying to game them. What most of us need is to secure the long-term capital market rates of return as efficiently as possible.

So our limited resource is not speed or access to information, but our own time. We only have a short window to live the lives we want. And that means we should start any investment plan with understanding ourselves.

That’s where the edge is.

No doubt, you have heard of the “sandwich generation” but what about the “dual-retirement phenomena”?

The greying of much of the population and the rapidly-expanding ranks of retirees are throwing up new challenges as well as new expressions to describe our changing lifestyles.

Members of the “sandwich generation” – typically in their forties, fifties or sixties – are still supporting their children, trying to save for own retirement yet also spending much time, and possibly money, helping care for their ageing parents.

In other words, they are “sandwiched” between the needs of their children and their parents – while attempting to look after their own interests.

According to a recent article in The New York Times – Two generations, retired and together – the “dual-retirement phenomena” occurs when two generations of the same family are in retirement.

There are, of course, similarities between these two intergenerational circumstances: A major cause of both is greater longevity and both can test family relationships – financially and emotionally.

Indeed, the “sandwich generation” and the “dual-retirement phenomena” summarise two of the countless social impacts of an ageing population, as broadly discussed in the 2015 intergenerational report.

Phyllis Moen, a sociological professor at the University of Minnesota, is quoted by The New York Times as saying that it is “historically unprecedented where you have older people and their still-older parents”. And families would have to “figure out those intergenerational relationships.”

Case studies in this article include a 99-year-old mother and her 71 year-old son, a retired data analyst, as well as a 62-year-old retired schoolteacher and her 88-year-old father.

In short, the younger retirees are dealing with both the challenges (and extra freedoms) of their own retirement while trying to care for the increasing needs of their very old and often frail parents.

It is worth revisiting a short article, Your investing life: Helping aging parents, published in late 2013 by Vanguard in the US. It suggests how adult children can help their ageing parents while not neglecting their own needs.

“If your parents are under financial constraints, you may want to tap into your retirement savings to help them,” Vanguard’s specialists write. “That’s an admirable instinct, but one with potential long-term financial consequences for you and your own children. Consider any such move carefully before you act.”

And perhaps try to talk to your ageing parent or parents about money while respecting their financial boundaries, the specialists add. Ideally, these conversations should cover such issues as whether they have enough money to meet their living expenses and whether any “unfortunate financial surprises” are on the horizon.

A practical way that adult children can assist is by ensuring that their ageing parents are receiving all of their government entitlements.

Individuals in the “sandwich generation” – who may also be experiencing or expect to experience the “dual-retirement phenomena” – may benefit from consulting a skilled financial planner about the best way to handle their inter-generational financial challenges.

Mountain peaks challenge the endurance, courage and skill of climbers. A celebration at reaching the top of a mountain – or perhaps more appropriately when you get safely back down – is both understandable and well-earned. But the sense of anticipation and celebration when a sharemarket index is within sight of or hits a new peak is a little harder to fathom.

The Australian market as measured by the S&P/ASX 200 index has been flirting with the 6000 barrier in recent weeks prompting considerable media speculation about when it might crack through this numerical tollgate.

The attention on the 6000 mark is understandable on one level – when the market does finally push above it that will mean it has gone above the high water mark set in January 2008 just before the storms of the global financial crisis hit.

New sharemarket highs are curious beasts. They seem to stir the animal spirits and bring out the cheer squads in a similar vein to the way a rising Australian dollar becomes a source of national pride.

Yet a record high on the sharemarket index is unambiguous in the sense it means prices have risen. So investors looking to invest more into the market are paying a higher price today. When was the last time you went shopping and felt good about paying more for something that you knew was cheaper a week ago?

So does it not seem curious that rising prices can actually make us feel positive about investing more into the sharemarket?

This should not be misconstrued as suggesting another GFC is imminent or prices are forecast to drop any time soon. Prices may well continue to rise for a considerable period of time although we know that the sharemarket is volatile and moves in cycles and we should expect negative years 1 in every 5.

Rather what it points to is the need for a disciplined, well-diversified approach to your entire portfolio – not just to your share portfolio.

Where record highs for market indexes may have a useful purpose is prompting a portfolio review and considering rebalancing the asset allocation to get back in step with your risk profile.

Rebalancing is a rational approach that is confronted by a significant emotional challenge. After a strongly rising sharemarket, rebalancing may mean selling down a portion of the well-performing share portfolio and buying into whatever the underperforming asset class is at the time.

Selling winners and (seemingly) buying losers can be a climb too far for many investors.

What value do you expect a financial adviser to add to your investment success? If you expect an adviser to create an investment portfolio that will consistently outperform the markets, you are likely to face disappointment.

It is a reality that an adviser will almost inevitably struggle to add value for a client through market-timing and selection of securities – particularly after costs and taxes are taken into account. This mirrors the difficulty faced by the majority of actively-managed funds despite their experience and resources.

Fortunately, skilled financial advisers can potentially contribute significantly to their clients’ investment long-term success in ways that have nothing to do with market-beating performance.

For the past 14 years, Vanguard’s Investment Strategy Group in the US has studied what it terms “Adviser’s Alpha”. This is defined as the value that advisers can add through their wealth management and financial planning skills – guiding their clients in such areas as asset allocation, cost and tax efficiency, and portfolio rebalancing – and as behavioural coaches.

In other words, skilful advisers can add considerable value by using the best wealth-management practices together with personally encouraging their clients to adopt disciplined, long-term approaches to investing.

Vanguard just has released a new Australian edition of this classic investment research, using local data in an endeavour to quantify the direct value or “alpha” an adviser may add through such services.

The authors of the Australian report – including Francis Kinniry, a principal of Vanguard’s Investment Strategy Group, conservatively estimate that “Adviser’s Alpha” may add about 3 per cent, at least, to a client’s net returns. Much, of course, will depend on an investor’s circumstances.

For many investors, the best investment and wealth management strategies described in the report are likely to provide an annual benefit – such as from reducing investment costs and taxes. Nevertheless, the most significant value-adding opportunities would tend to occur intermittently and often during times of market duress or euphoria, according to the report.

During market duress or euphoria, advisers can act to urge their clients not to abandon carefully-prepared and appropriate long-term strategies in response to widespread market fear or greed.

Vanguard’s report outlines six ways that adviser’s can potentially add value that have no relationship to attempts to outperform any benchmarks:

• Asset allocation. As Smart Investing has discussed many times, research has long shown that asset allocation is the primary determinant of a portfolio’s return viability and long-term performance. Advisers can guide clients on the creation of portfolios designed to maximise their potential returns within their personal tolerance to risk.
• Behavioural coaching. With a strong personal relationship with a client, an adviser is in an excellent position to encourage a disciplined, long-term approach to investing as opposed to getting caught up with the prevailing emotions and “noise” of the markets.
• Cost-effective investing. By encouraging clients to invest in low-cost managed funds such as traditional index funds and Exchange Traded Funds (ETFS), advisers can add considerable value. The report uses Australian data to support this point.
• Rebalancing. Through periodic rebalancing of a portfolio, an adviser can ensure that a client’s asset allocation remains consistent with the risk/return characteristics of their target or long-term portfolio.
• Tax efficiency. Advisers can create strategies to ensure that their clients make the most of tax-advantaged savings opportunities over the long term from acquisition to disposal.
• Total-return versus income investing. Particularly at a time of historically low yields from balanced and fixed-income portfolios, advisers can explain to clients the benefits of focusing on their total returns from a diversified portfolio – that is income plus capital appreciation.

Advisers can alert clients to the added risks of moving away from well-thought-out investment plan in an effort to maintain their yields.

Significantly, this Adviser’s Alpha research should reinforce the qualities that investors should look for when choosing a financial adviser as well as reinforcing the fundamentals of sound investment practice.

Forecasts are always fraught with danger. The longer the time frame the more susceptible forecasts will be to wide variations in the range of possible outcomes. Which makes the Federal Government’s Intergenerational Report (IGR) such a fascinating exercise given it is trying to forecast what Australia will look like four decades hence.

The government of the day is required to produce the IGR every five years and its scope is to look at population trends, workforce participation and the productivity level of our economy.

The aim of the report is to promote community discussion about long-term government policy settings with a focus on intergenerational fairness.

The value of the IGR is clearly in the broad brush strokes it paints rather than the precision of its forecasts.

Demographics in so many ways define our destiny as a community and the demographic trends that this and the three previous reports have charted are clear.

The Australian population will be larger – around 40 million souls by 2055 – and much older with almost 5% or nearly 2 million people being aged 85 and over.

The good news is that average life expectancy at birth is forecast to continue to rise so that by 2055 men and women can look forward to lives spanning 95 to 96 years.

Not so positive is that as the population ages the workforce participation rate will slide. Where in 1975 there were more than seven people of working age (defined as 15-64) for every person aged 65 and over, by 2055 there will be less than three.

That has major implications for our productivity growth – not surprisingly it is expected to slow – but also for high cost budget items like the funding of the health system and the age pension.

The latest IGR will certainly inform and provoke debate around key policy settings within the tax system, the superannuation system and health services. Superannuation comes in for special mention in the report – in particular how as account balances grow, the implication for the Government will be reduced reliance on payments made through the age pension.

The report makes the point that the Government is “considering improving the way in which the superannuation system transforms savings into retirement income streams”.

While the report is about macro demographic and economic trends considered from an individual investor’s perspective there are some interesting – and at times conflicting – messages.

For a start the growing importance of the super system in meeting some of the challenges of the future and – as an investor – making sure you are saving enough for what is likely to be a longer period in retirement.

The paradox that is likely to emerge through the tax white paper discussion later in the year is that the super system’s generous tax concessions are likely to come under heavy scrutiny as the Government looks to improve the budget position.

The risk for investors is that the rules governing super will continue to change.

The irony for the Government is that while they need people to save more for their retirement to reduce reliance on the age pension the more they change the rules governing super and the more they undermine confidence in the system overall.

The major demographic trend of an ageing population is a significant challenge for Australia whether you look out 10, 20 or 40 years.

The superannuation system can provide a compelling answer to at least some of those challenges but it needs a period of policy stability that – like the Government’s latest report – truly spans this and the next generations.

A temptation for investors to resist when the outlook for investment returns is subdued is to abandon a carefully-constructed and appropriately-diversified portfolio in an effort to boost, or at least maintain, returns.

Vanguard’s economic and investment outlook 2015, Australian edition encourages investors to “evaluate carefully” the risk/return trade-off involved before shifting into higher-risk asset classes in their pursuit of returns.

In short, higher potential returns mean higher risks. It’s as straightforward as that.

As Vanguard’s report discusses, a shift to higher-risk assets may include “tilting a bond portfolio towards corporates [bonds] or a wholesale move from bonds into equities”.

The report’s authors are economic and investment specialists with Vanguard: global chief economist, Joseph Davis; Hong Kong-based senior economist for Asia-Pacific, Qian Wang; Australian-based economist, Alexis Gray; and US-based investment analyst, Harshdeep Ahluwalia.

They suggest that investors with investment objectives based either on set spending requirements or on performance targets may need to consciously assess whether they can tolerate the extra risk involved to still meet their goals.

The report concludes that a balanced approach would be for investors to consider adjusting their investment objectives given the outlook for lower returns. In other words, adopting a realistic approach to likely returns rather than taking greater risks.

Significantly, the global investment and economic outlook is discussed from the perspective of an investor with an Australian-denominated portfolio. (Read the report to learn more about its findings and the basis for its investment and economic outlook.)

Some of the key points made in Vanguard’s economic and investment outlook include:

• Global economic growth is likely to remain “frustrating fragile for some time”
• The investment environment is likely to be “more challenging and volatile in the years ahead”.
• Vanguard outlook for global stocks and bonds while not bearish is the “most guarded since 2006 given compressed risk premiums and the low-rate environment”.
• Modelling suggests that balanced portfolio returns over the next decade are likely to be below their long-term historical averages. “Even so, Vanguard still firmly believes that the principles of portfolio construction remain unchanged, given the expected risk – return trade-off between stocks and bonds.”
• Investors should have realistic expectations for investment returns and understand the implications of the prevailing market for their portfolios.
• A disciplined approach to investing should be maintained to achieve long-term investment success.

To treat the future with the deference it deserves, Vanguard believes that market forecasts are best viewed in a “probabilistic framework”. A primary objective of the report is to assist investors in making all-important strategic asset allocation decisions for their portfolios.

A critical take-away message is that investors should not readily surrender a carefully-constructed portfolio and move beyond their personal tolerance to risk in an attempt to lift performance in a lower-return environment.

No doubt, many astute investors will look at making some adjustments to their spending and their saving patterns, among other things, rather than taking on higher investment risks.

This may include if possible: taking a tighter control of spending, reducing investment management costs with lower-cost managed funds, considering postponing retirement (of course, not everyone can), and trying to save more to build-up investment capital.

It is also worth thinking again about the role of bonds in a diversified portfolio. In their role as a diversifier, bonds counterbalance the volatility of shares and other growth assets to reduce the variability of portfolio returns. The primary role of bonds is provide diversification to growth assets, income and capital stability.

Divergence in economies and markets were major themes in 2014, alongside geopolitical risk and falling commodity prices. This document is a handy resource for reminding clients about importance of diversification and discipline… Read More

The media would have you believe that a successful investment experience comes from picking stocks, timing your entry and exit points, making accurate predictions and outguessing the market. Is there a better way?

It’s true that some people do get lucky by making bets on certain stocks and sectors or getting in or out at the right time or correctly guessing movements in interest rates or currencies. But depending on luck is simply not a sustainable strategy.

The alternative approach to investment may not sound as exciting, but is also a lot less work. It essentially means reducing as far as possible the influence of fortune, taking a long-term view and starting with your own needs and risk appetite.

Of course, risk can never be completely eliminated and there are no guarantees about anything in life. But you can increase your chances of a successful investment experience if you keep these 10 guidelines in mind:

1. Let the market work for you. Prices of securities in competitive financial markets represent the collective judgment of millions of investors based on current information. So, instead of second guessing the market, work with it.
2. Investment is not speculation. What is promoted in the media as investment is often just speculation. It’s about making short-term and concentrated bets. Few people succeed this way, particularly after you take fees into account.
3. Take a long-term view. Over time, capital markets provide a positive rate of return. As an investor risking your capital, you have a right to the share of that wealth. But keep in mind, the return is not there every day, month or year.
4. Consider the drivers of returns. Differences in returns are explained by certain dimensions identified by academic research as pervasive, persistent and robust. So it makes sense to build portfolios around these.
5. Practise smart diversification. A sound portfolio doesn’t just capture reliable sources of expected return. It reduces unnecessary risks like holding too few stocks, sectors or countries. Diversification helps to overcome that.
6. Avoid market timing. You never know which markets will be the best performers from year to year. Being well diversified means you’re positioned to capture the returns whenever and wherever they appear.
7. Manage your emotions. People who let their emotions dictate their decisions can end up buying at the top when greed is dominant and selling at the bottom when fear takes over. The alternative is to remain realistic.
8. Look beyond the headlines. The media is by necessity focused on the short term. This can give you a distorted impression of the market. Keep up with the news by all means, but you don’t have to act on it.
9. Keep costs low. Day to day moves in the market are temporary, but costs are permanent. Over time, they can put a real dent in your wealth plans. That’s why it makes sense to be mindful of fees and expenses.
10. Focus on what you can control. You have no control over the markets, but in consultation with advisor acting in your interests you can create a low-cost, diversified portfolio that matches your needs and risk tolerance.

That’s the whole story in a nutshell. Investment is really not that complicated. In fact, the more complicated that people make it sound the more you should be sceptical.

The truth is markets are so competitive that you can save yourself much time, trouble and expense by letting them work for you. That means structuring a portfolio across the broad dimensions of return, being mindful of cost and focusing on your own needs and circumstances, not what the media is trying to sell you.

As human beings, we are hard wired to tell stories about our experience. Applying tidy narrative structures to often random events helps us to make sense of the world. And this impulse tends to really kick in around the end of the calendar year when we’re taking stock.

Tapping into this tendency, media outlets populate their year-end editions with stories that seek to build catchy tunes out of noisy reality. In the financial media, the set narrative is applied to investment. So we’re told this year has been all about “x” and next year will be all about “y”.

Annual investment outlooks and media round-tables about the year ahead can be entertaining to read, of course. Everyone has a right to their opinion, and some professional pundits can be adept at telling convincing sounding stories about the future that resonate with readers. But problems can arise when individual investors act on those forecasts, overlooking how much each scenario is dependent on a whole host of other assumptions. Ultimately, the world is much more complex than any conventional narrative can accommodate.

For instance, each year around this time The Australian newspaper publishes its “Top 100 Picks”¹for investors in the coming 12 months. Inevitably, there are some winners in the “collected wisdom” of the journalists and contributors, but there are also plenty that miss the mark.

Often these picks are based on a view about a particular sector. So we were told a year ago that Moko Social Media (MKB), which builds smartphone apps, would be a “cool dude” investment for 2014. Cool perhaps, but not in a good way. As of early December, Moko’s one-year return was -45%.

Not deterred by its disastrous picks in the gold sector the year before, the newspaper doubled down in its 2014 outlook, singling out miner Beadell Resources (BDR) as one seen as “absurdly undervalued”. Well, perhaps not by enough, as Beadell was down by 73% a year later.

Elsewhere among miners, The Australian saw exciting prospects for Guildford Coal (GUF). But perhaps the panel didn’t count on the 15-20% slide in coal prices in the intervening year as the stock had delivered a one-year return of -51% as of early December.

In the gaming sector, the newspaper’s forecasters picked two stocks. One of them, slot machine maker Aristocrat Leisure (ALL), delivered with a positive return of 45%. But the other pick, rival gaming machine maker Ainsworth Game Technology (AGI), fell 50%. Call it a 50/50 bet then.

Ultimately, it seems clear that investing this way (judging the future prospects of individual companies) is a bit of a crap shoot. You’ll get some calls right and others wrong. And even your good calls, based on the individual company information, can come undone due to outside influences.

For instance, resource companies can be hostage to the commodity price cycle. Retailers can be influenced by changes in household spending patterns and the macro economy. Regulation and interest rate cycles can influence the fortunes of financial services companies.

So even if you carefully study each company’s management, product range, industry position, balance sheet, analyst ratings and all the other variables that influence its outlook, there is still no guarantee you will get it right. There are just so many variables to consider.

We have seen that “bottom-up” forecasting (judging the outlook for individual securities) is notoriously difficult. But top-down forecasting (picking the movements of big economic variables) isn’t easy either.

In January of 2014, The Sydney Morning Herald asked a panel of six economists their forecasts for cash rates, the $A and shares. While their forecasts for the currency and shares were broadly correct, all six predicted cash rates would rise. As of yearend, though, the cash rate remains at 2.5% and the market increasingly expects the next move to be down.²

It seems pretty clear, then, that basing your investment strategy upon the forecasts of share analysts, economists and journalists about the outlook for individual companies, sectors, industries and the broader Australian and global economy is a dicey proposition.

So what can you do? First, you can start by accepting that all those views about the outlook—from the rosy to the gloomy—are already reflected in market prices. Some people will get it right sometimes. Others will get it wrong. But the winners and losers are changing all the time.

This is no reflection on the skills of forecasters, by the way. Their cases may be based on first-rate analysis. But because they can’t forecast every variable and because new information is always coming into the market, their assumptions can quickly go awry.

The alternative to hitching your fortunes to a forecaster is to harness the collective information already built into prices, which are always changing as news develops. By the time you have spent days and weeks poring over forecasts, the market has already moved on.

The second thing to do is diversify. Will Australia outperform global shares in 2015? Will interest rates rise? Will they fall? Has the Australian dollar bottomed out? Will mining stocks recover? What will drive growth domestically? How about internationally? Which sectors will perform best?

The truth is no-one knows the answers to these questions with any confidence. We see that over and over again. So the smart response is to spread your risk. Some sectors will do well next year. Others will do badly. As we don’t know which is which, we can own a bit of each of them.

The third thing to do is to focus on things you can control. Costs can make a huge difference to investment outcomes, as can taxes. What matters to you ultimately are not just the returns from your investments, but what is left in your pocket after fees and taxes.

A final reminder is to regularly rebalance. That just means ensuring your allocation to various asset classes remains in line with your original targets based on your risk appetite and goals. So if shares have had a bad year and bonds a good one, you might take some money out of the strong performer and reinvest into the underperformer. This means you are selling high and buying low.

Most of all, keep in mind that risk and investment go hand in hand. No investor can expect greater returns without bearing greater risk. As we don’t know when risk will be rewarded, the best approach is to stick to the plan you decided on with your financial advisor.

It’s in our nature at the end of the year to look back on the last 12 months and project possible outcomes for the coming year. The danger, as we have seen, is in investing our own money in a forecast that assumes the world is much less complex than it really is.

Letting go of the idea that successful investment comes from making accurate predictions about the market and economy can free you up to focus on what is within your control—like asset allocation, diversification, costs, taxes, discipline and rebalancing. In the meantime, many happy returns!

Success in investing is not just about capturing the reliable sources of return. It is about reducing or eliminating avoidable risks such as holding too few securities or betting on specific industries. As an example, let’s look at the big bets some people made on gold stocks in recent years.

Gold as a commodity and companies that mine gold hold a particular attraction for some investors, who see the precious metal as a hedge against inflation. Others believe gold is a safe haven in times of market volatility. Some even see it as bolt-hole in the event of the collapse of fiat money.

We have addressed in an earlier column the question of gold as an investment, but gold miners have their own issues. While the gold price is obviously an influence, the performance of gold stocks also is driven by the underlying businesses and the difficulties in profitably mining the metal.

Back in January 2013, after a difficult year for gold miners, The Australian Financial Review asked analysts about the outlook for the sector. The resulting story (“Goldminers Look Undervalued”) said the sector was oversold and “ripe for investment”.¹

Indeed, one major US investment bank was quoted as saying the gold sector was “littered with opportunity”, with Australian gold equities trading at discounts of 17% to the broader mining index and 28% to the underlying price of gold.

In retrospect, that has been a bad call. In fact, some of of worst performing stocks on the Australian share market from the end of 2012 to November 2014, were gold miners. Indeed, six stocks (Silver Lake Resources, Medusa Mining, Perseus Mining, Troy Resources, Kingsgate Consolidated and Resolute Mining) fell between 80 and 90% over this period.

Over the same timeframe, the broad market, as defined by the S&P/ASX 300 accumulation index, has gained more than 25%. So the gold sector’s performance has been pitiful.

Why have gold stocks failed to live up to the media hype in recent years? Well, the price of gold is one reason. Gold bullion peaked at around $US1900 an ounce in September 2011 and has declined nearly 40% since then to around $US1160, its lowest level in more than four years.

Gold’s recent decline partly mirrors the resurgence in the US dollar, which has climbed to multi-year highs against the Japanese yen, the euro, the Australian dollar and other currencies on the view that the US economy is outperforming other developed economies.

For gold miners who base the profitability of their operations on certain forward assumptions about the price of the underlying commodity, the market performance of gold is obviously a concern.

But stock-specific issues also influence these companies. Prospects are often in far-flung and inaccessible parts of the world. Miners can face long lead times and regulatory hurdles between prospecting and actually mining gold. Development costs frequently escalate and sourcing skilled labour can be a challenge. On top of that, there can be significant variation in grades, which refers to the proportion of gold contained in the ore of a particular mine.

These factors all represent substantial uncertainties for investors in gold companies. Of course, the potential rewards can be significant, but so too can the risks.

None of this is to say that gold as a commodity or gold stocks should not have a place in a diversified portfolio. But it is a warning against building an investment strategy around opinions about the outlook for a particular industry or market sector.

This is why diversification is an essential tool for investors. While it will never eliminate risk completely, diversification does help lessen the random influences governing individual stocks and sectors and positions portfolios to capture the returns of broad economic forces.

Of course, it is possible to hit the jackpot with a bet on an individual sector. But this is not a replicable or scalable strategy and if you don’t strike it lucky, there’s nothing to fall back on.

There may be gold in them there hills, but it won’t necessarily make you rich.