| Investing in Commodities: A Wise Choice? |
 |
 |
 |
| Written by Larry Swedroe | ||||||||||||||||||||||||
| Thursday, 21 May 2009 00:00 | ||||||||||||||||||||||||
|
Page 1 of 2 Overview: On the surface, investing in commodities may not look attractive to investors. However, looking at the asset class in isolation is a mistake. The following takes a look at the potential effect commodities investing has on a portfolio.
One of the more hotly debated issues among both academics and investors in general is: Should investors include an allocation to commodities in their portfolios? While there are arguments on both sides, the academic evidence favors including some exposure to commodities. Allocations to commodities are frequently discussed in terms of providing portfolio insurance against unexpected inflation. One of the arguments against including commodities is that they have no real expected return above the rate of inflation. While this is true, the argument is not a sufficient one. The reason is that an investment should never be viewed in isolation. Instead, it should be judged based on how its addition impacts a portfolio’s overall risk and return. Consider the following from the period of January 1991 through March 2009: There are two main reasons for using this period. First, this allows for examining the returns of the two major commodities indexes: the GSCI and the DJ-AIGCI. Second, the U.S. Consumer Price Index rose just 2.6 percent per year during this period, or 0.4 percent below its long-term average of 3 percent. This means the time period used was one where the portfolio insurance against inflation that commodities provide was not needed. Thus (with the benefit of hindsight), this should not be a particularly good period for commodities.
Investors looking at this data would question why they should have invested in commodities. However, looking at commodities when part of a portfolio can offer a different conclusion:
|
||||||||||||||||||||||||
| Last Updated on Friday, 12 June 2009 07:30 |