Its asset allocation strategy is based on holding and rebalancing a portfolio of large cap stocks, small cap stocks, foreign stocks, high grade bonds, high yield bonds, inflation-adjusted Treasurys, real estate investment trust and mining shares. Since we debuted the portfolio 12 years ago, it has handily outperformed the S&P 500 while taking far less risk than being fully invested in stocks.
A few years ago, however, many investors argued we were missing the boat. Where were the commodities in this strategy? Somehow, they complained, we had forgotten them.
Actually, we had remembered them… and what poor returns they deliver.
As Benjamin Graham, the father of value investing and mentor to Warren Buffett, once wrote, “An investment promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Did you just hear a bell ring?
Yes, we all saw raw material prices rise just before and during the financial crisis as investors lost faith in fiat currencies, common stocks and corporate bonds. But it was always destined to be short-lived. Commodities aren’t productive assets. They accrue no interest, generate no earnings, pay no dividends and provide no rental income.
Buying commodities to hedge your portfolio is nothing more than placing a wager, one that hasn’t worked well for the past 142 years. A study by SG Cross Asset Research shows that since 1871 investors could have earned modest real (after inflation) returns in T-bills, decent real returns in corporate or government bonds, and fabulous returns in a diversified portfolio of stocks. But commodities in real terms aren’t worth any more than they were 142 years ago.
It’s far more lucrative to invest in human ingenuity than a bushel of wheat or a barrel of oil. Yet commodity traders tend to learn this lesson the hard way. Desperate to invest in “alternative assets” when the stock market was hitting new lows a few years ago, many diversified into the Goldman Sachs Commodity Index, an unleveraged, long-only investment in a basket of 24 commodities, from crude oil to soybeans to aluminum to cattle.
And their timing couldn’t have been worse. Over the last three years, the index has dived 16.36%.
Who’s to say commodity prices won’t bounce back? No one, of course. That’s what makes them speculative. But please don’t buy