DIY Investor Diary: ‘quant’ approach goes big on gold and bonds

From inflation to recession, the external forces that keep investors up at night are depressingly high in number.

Unfortunately that’s not the whole of the problem, with another threat to returns coming from within.

We are only human and can commit plenty of behavioural mistakes in investing, from panic selling when markets falter to betting too big on something that ultimately proves speculative.

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With that in mind, any process that takes the emotion out of investing can be pretty appealing. For those with the right brain and the right experience, this can result in a fairly sophisticated approach that might safeguard our savings.

A love of investing begins

One ii customer, now in his late 40s, has a moving story when it comes to how his investment journey began. When he was born in 1977, his grandparents put £1,000 into an investment account on his behalf. The success of that account ultimately showed him the merit of investing.

“My parents might have put some money in too, and it had grown,” he says. “By 2000 it had grown to something like £15,000.”

In a personal touch, the investor’s dad would show him the account statements pointing to how his wealth had grown, making quite the impression. “I was in my mid-20s and saw the power of how an investment grows,” he says.

He would later assume control of this account and now runs a self-invested personal pension (SIPP), simply with the aim of saving as much as possible for retirement.

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He would also like to follow in the footsteps of his father, by inspiring his 15-year-old son, for whom he invests, to love investing. This, however, is a work in progress.

“I’ve got a similar thing going for my son and he’s showing signs of being a bit of a renegade,” he says. “He’s just going to take it out and buy a Lamborghini. He has talked about his motorbike licence.”

Quant over humans

If this individual’s love of investing has simple roots, the approach he takes to building wealth relies on his professional skills and experience, and has a more complicated form.

Having worked as a trader in the past, with an educational background in physics and statistics, and feeling comfortable with coding and data, he has created a dataset looking at how different combinations of investments would have behaved in market conditions going all the way back to the start of 2008.

This gives him a period that captures some serious ups and downs, from the financial crash to a major gold sell-off in 2013, the eurozone crisis, the Covid-19 lockdown and the growth sell-off of 2022, as well as Brexit.

He follows a conditional drawdown at risk optimisation process.

This term, which is admittedly quite the mouthful, applies to a process aimed at getting a mix of investment assets which limits losses to a given investor’s level of tolerance. In this case, the mix of assets is based on how different investments have fared across the time period covered by the dataset.

“The process is based on expected loss,” the investor says. “In the worst 5% of tail events I want to have an average loss of 10%. The system runs through historical market data and asks what this looks like. For example, the Nasdaq lost something like 90% in the dot-com bust.”

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If this sounds complicated, the resulting portfolio itself is pretty simple.

This ii customer uses a mere four funds, with approximately 49% of this portfolio in the iShares Core MSCI World ETF USD Acc GBP (LSE:SWDA), 31% in the iShares Physical Gold ETC GBP (LSE:SGLN), 17% in the iShares Core UK Gilts ETF GBP Dist (LSE:IGLT) and the remainder in the iShares UK Gilts 0-5yr ETF GBP Dist (LSE:IGLS).

“I worked on a metals trading desk at a bank where I researched quantitative trading strategies on precious and base metals,” he says.

“It’s familiarity with equities that gets everyone into equities, but I’m not deterred from precious metals.”

He has also traded government bonds in the past, explaining a comfort with gilts.

Aims and returns

As our second table shows, the performance of this portfolio has been strong in recent history, boosted by the stellar returns of gold.

“It performed particularly well through the April 2025 drop, and is now benefiting from what’s often called the debasement trade where gold responds positively to fiscal expansion and currency erosion,” he says. “And in the event things don’t go pear-shaped, government bonds may rally.”

“Over the full period from the end of 2007 to date, gold has actually delivered a higher total return than the MSCI World, with lower annual volatility, which reinforces its role as a strategic allocation, not just a hedge,” he adds.

And yet this system does require some maintenance.

He has to rebalance the portfolio back to its original weightings, quite a task given the big moves in equity and gold in recent years.

He times his rebalancing between gold and equities based on the spread, or ratio in prices, of the MSCI World versus the gold price – a figure he can check in the Moneydance software he uses to track his trading.

“The S&P 500 versus gold spread is relatively stable over time [100+ years] but bounces around in the short term,” he explains.

“I’ve been making money on the rebalancing. Even though both look expensive on a relative basis, one can look expensive versus another. I should be rebalancing every day. But it would end up being expensive doing that.”

Nothing perfect

The investor, who has around £500,000 in his SIPP and is running money in a similar fashion on behalf of his wife as well as his son, does have concerns.

He notes that he does “definitely get tempted” to deviate from the systematic approach he follows, while he also worries about the finances of the UK government and how that relates to his big position in its debt.

“These tax measures [announced in the Budget] are all deferred and my personal view is we start to look like Italy did and less like Germany,” he says.

“With this news of reduced equity issuance in the City, there’s less tax take in the City. I wonder how we’re going to service our debt.

“If the British government is going to go pop, 20% of my stuff is in government bonds,” he adds. “If the government screws things up, I could lose 70% - I get a dividend but it feels like I might be picking up pennies in front of a steamroller.”

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Having said that, he notes that any such financial disaster would likely boost his gold holdings even further.

Beyond employing his skills to make money with some protection on the downside, this investor likes the fact that taking a quantitative approach removes some of the emotion from investing – even if it still comes with its difficult moments.

“There’s a horror story in my family where people have got really badly burned [investing],” he says.

“If something goes wrong, but you follow a system, it’s more palatable than if you go beyond the system.”

In our DIY Investor Diary series, we speak to interactive investor customers to find out how they invest in funds and investment trusts, what their goals and objectives are, current issues and concerns regarding their portfolio, and what they’ve learned along the way. The aim is to provide inspiration for other investors, and we would love to hear from more people who would like to be involved. We do not require those featured to be named. If you are interested, please email our funds and investment education editor directly at: kyle.caldwell@ii.co.uk.