For the longest time, I have had a hunch about how the average Malaysian and folks similar to him / her in emerging markets should invest. It was just a hunch based on observations rather than hard analysis backed by data.
My hunch was that people in Malaysia who are only able to invest in local equities are better off holding their investment in gold; and that this rule of thumb worked for anyone in the same situation in emerging markets with currencies that are not pegged to something like the US dollar. For the following reasons:
- Gold is a great store of value; a hedge against inflation and against currency weakness;
- Even better, in the long run, gold typically outperforms equities – even if you have reinvested the dividends you get from the shares you hold;
- But, over short periods of time like when the economy is booming, equities may outperform gold.
My hunch came to a head a couple of months ago when I chatted with a well known Malaysian financial planning expert about how people should invest. To be fair, he only deals with clients with RM200,000 or more to invest so his clients probably have the ability to invest in international equities (unlike the average Malaysian). His key takeaway when it came to gold was something I have heard many times – and in every single way, the complete opposite of my view on gold.
- Gold is a great store of value and a hedge against inflation.
- However, in the long run, stocks typically outperform any price increase in gold – especially if you have reinvested the dividends you get from the shares you hold
- Nevertheless, over certain periods like times of crises, gold may outperform equities
At the time of the conversation, I couldn’t help thinking that his investment view was not right for the majority of Malaysians and yet he did not qualify his investment advice. But I didn’t have the analysis and data to argue one way or the other. I suspect that his (like many Malaysian financial experts’) view on the equities versus gold debate was not a result of local insight on Malaysian market conditions but reliant wholly on previous research done on US equities for US and other developed markets.
So I decided to do the research and here is what I found.
The expert was right – in the long run, equities typically outperform any price increase in gold – especially if you have reinvested the dividends you get from the shares you hold. It is also true – over certain periods, gold may outperform equities. BUT it is true ONLY if you are an investor with US equities.
Over the last 25 years (up to the beginning of October 2020), the S&P 500 has significantly outperformed gold in 2 of the 5 periods: 10- and 25-year investment periods; while gold has only significantly outperformed the S&P 500 once: 20-year investment period; the remaining two periods (5- and 15-year) were marginal.
So if you are fortunate enough to have access to US equities (and, if my hunch is correct, developed market equities), then what the well known financial planning expert said is definitely more correct than incorrect.
But how many of us have the good fortune of having access to US equities? For the many Malaysians and other people living in emerging markets, is it better to hold equities instead of gold?
In every single corresponding period, an investor would have been better off buying gold instead of the KLCI – even he had reinvested all the dividends.
And it isn’t just a Malaysian phenomenon. I did the similar analyses for Thailand, Indonesia, Egypt, Mexico and Nigeria with similar results. My theory is that what works for developed markets is reversed for emerging markets – particularly emerging markets with currencies that are not pegged to something like the US dollar.
So what does this mean for the average Malaysian who probably does not have access to financial experts or to international equities?
You may still want to buy the KLCI, but you should consider putting some of that hard earned money into gold.
