Wednesday, October 6, 2010

Does a Commodity Investment Belong in Your Toolkit?

, Morningstar.

Question: A couple of years ago, it seemed that everyone was recommending that I put a small percentage of my portfolio in commodities to help fight against inflation. But lately I've been reading more about the how these funds haven't worked out as expected. So should I add commodities, or not?

Answer: Thanks for a timely question. Although there's a lot of research pointing to the beneficial effects of holding commodities in a portfolio, lately investors might be feeling like the current batch of commodity-focused products isn't quite ready for prime time.

I'll admit that I was a skeptic when financial-services firms and advisors began pushing commodities five or so years ago. Commodities enjoyed a stunning runup in the first part of this decade, and asset classes always seem to catch on as "must-have"only after they have enjoyed a big period of outperformance. Coincidence? I think not.

The Good…
True, there are a lot of data pointing to the long-term benefits of commodities as a portion of a long-term portfolio. For one thing, commodities--and here I'm talking about the prices of actual, physical stuff like metals, agricultural goods, and energy products--have a relatively low correlation with the price performance of traditional asset classes like stocks and bonds. That diversification ability, in turn, can improve a portfolio's risk/reward profile, even though commodity prices are extraordinarily volatile in and of themselves. (more)

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