How Much Of An Investor’s Portfolio Should Be In Commodities? [First Trust ISE Global Copper Index Fund, SPDR Gold Trust (ETF)]

under pressure. Yes, they’re up a bit this year, but they plunged 9.5% in 2013, lagging stocks, bonds and real estate badly.

Not a Diversifier

Some pundits – especially those who sell commodity products for a living – insist that raw materials are a good diversification. They’re not. To own them, you have to take money out of stocks and bonds, both of which have handily outperformed commodities over the long haul.

Moreover, 17% of the market value of the S&P 500(INDEXSP:.INX) consists of companies in energy, utilities and basic materials. So you likely have exposure to commodities – and these companies often turn a profit even if prices stagnate.

How about as an inflation hedge? There hasn’t been much inflation to hedge lately. Sure, you can point to higher prices at the pump or the doctor’s office. But I’ll point to lower prices (and far superior quality) on homes, cars, electronics and more.

Even if inflation does raise its ugly head again, raw materials are hardly the only – or the best – inflation hedge.

Your home is an inflation hedge. Treasury Inflation-Protected Securities (TIPS) are an inflation hedge. And, unlike gold or commodities, TIPS actually guarantee that your money keeps pace with inflation, something gold hasn’t done over the last 35 years.

(I’m not arguing against gold, incidentally, something you should hold in your portfolio for the same reason you keep a spare tire in your trunk.)

But a substantial allocation to commodities? Only if you’re a speculator playing with money you can afford to lose.

Good investing,

by Alexander Green, Chief Investment Strategist

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

Related: iPath DJ-UBS Coffee Subindex Total Return SM Index ETN(NYSEARCA:JO), First Trust ISE Global Copper Index Fund(NASDAQ:CU), SPDR Gold Trust (ETF)(NYSEARCA:GLD), iPath Pure Beta Livestock ETN(NYSEARCA:LSTK)

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