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Understanding Hard Asset Stocks

Do hard asset stocks act like other stocks?

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David John Marotta
President, Marotta Wealth Management, Inc., Marotta Wealth Management, Inc.
http://www.emarotta.com  
434-244-0000

David John Marotta is the President of Marotta Wealth Management, a fee-only financial planning and asset management firm in Charlottesville, Virginia. He is an oft-quoted writer and speaker on financial matters and his weekly financial column can be found at www.eMarotta.com

Do hard asset stocks act like other stocks?

 

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Speaker:Do hard-asset stocks act like other stocks?

David Marotta:The beauty of hard-asset stocks is they are not highly co-related to the rest of the US or foreign markets. So, the co-relation between the natural resource index and the SMP 500 is only about 38%, that means the hard-assets are going to act like their own asset category. And they also -- they are even lower co-relation with bonds. The co-relation with bonds is about negative 21%. So, when bonds go up, hard-assets dont do as well, when bonds go down, hard-assets do very well. And so, because of that, its good to use hard-assets to balance a bond portfolio. The reason for this is the danger in a bond portfolio is inflation and a bond portfolio maybe paying a 7% rate of return. All you have to have is inflation go up, higher than 7%. You are actually losing money after inflation. Well, during inflation, hard-assets stocks do very well. Imagine a gold mining company and it cost the gold mining company $290 to get an ounce of gold out of the ground. And they can sell it for $300 an ounce. So, they have made $10 an ounce profit. All it takes is for gold to go from $300 to $310 an ounce and their profit doubles from $10 an ounce to $20 an ounce. Well during inflationary times, when gold goes from $300 an ounce to $500 an ounce. Now, all of a sudden the price of a gold mining company goes through the roof. So, a little bit of a hard-assets stock can end up balancing a bond portfolio and the two will provide a better ride together than they will separately.

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