Many investors and professional money managers over the past ten to fifteen years have allocated a significant amount of funds into the ‘commodity' asset class.
The reasons given for this allocation included equity-like long term returns, a guard against inflation and the printing of ‘fiat money' by world governments, and the promise of low correlations to other investments.
If these claims were accurate, most portfolios would benefit from adding the allocation in any manner, as overall long term returns would not be affected (or possibly even increase), risk would be decreased, and the investor would gain a valuable defense against future inflation pressures.
Since 2007 all these reasons to own commodities have been challenged. The correlation to equities went to near one in 2008/2009, returns from 2007 through 2014 have been much lower than other asset classes, and inflation has not been on the radar. Despite these concerns, most investors should consider some exposure to ‘commodities', but generally only in certain ways.
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Understanding The Challenges
First to address the recent lackluster behavior of the asset class:
- High correlation to equities in 2008/2009: The most effective ways to invest in commodities will always have a high correlation to equities in the worst of times (but so will almost all other asset classes). This is not a reason to keep out, as for the vast majority of time there will be a correlation benefit and in a crisis such as 2008/2009 all asset classes except for some high quality bonds tend to be highly correlated.
- Lower recent returns vs. most other asset classes: Although most commodities have lagged real estate and traditional equities over recent years ...
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