Do hard asset stocks act like other stocks?

    Published: 06-16-2009
    Views: 9,987
    Financial Advisor David John Marotta explains the differences and similarities of hard asset stocks and other stocks.

    David John Marotta

    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

    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.