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People keep talking about percentage of stocks vs bonds to manage risk when building a personal investment portfolio.

What's the role that commodities have in managing risk when building an IRA portfolio?

Should I consider them as bonds or I should just ignore them when trying to balance my stocks vs bonds percentage?

NOTE: With investing in commodities I refer to ETFs as GLD, IAU, JJA, DBA, etc..

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Disclaimer - whatever is the antonym of "gold bug," that's me. By most measures, gold is in speculative bubble territory right now. I find it curious that the correlation is high between the rising price of gold and those who want to buy in. If a Ford Taurus were suddenly $50K, would you be more or less inclined to want one?

Many (not all, maybe most) planners will advise a mix of stocks and bonds for diversification. At a certain size portfolio, one would be sure the stocks are including foreign companies, and one might also add real estate in the form of REITs. One can do very well just with this type of approach.

That said, if you created a mix of commodities, say 10, and each year rebalanced, keeping the 10% level for each (in your commodity 'fund') you might actually get a decent return over time, as the volatility of each would provide a return, the rebalancing having the effect of buying low/selling high, and as a whole it would be uncorrelated to stocks or bonds. This is one premise of managed futures. It's also not for most investors as most lack the discipline to succeed at capturing the benefit of such an approach.

Your ETFs listed contained agriculture as well as metal. In the long term, my lifetime, say, as I am 48, food has gotten cheaper. If you could eliminate the oddity of the cost of futures contracts and storage and simply bet on the price, long term it costs fewer man-hours worked to buy food. For this observation, I don't consider it a long term investment, but only to be used, if at all, as a component of the managed futures approach I mentioned.

The short answer to your question is "for most people, none."

Edit - when I wrote this answer, gold was at $1770. Now, April 2015, it's at $1200. The S&P at the time was 1200, vs 2100 today. Gold down over 30%, S&P up 75% (plus another 7 or so for dividends.)

  • Not planning on buying gold, don't worry! ;) Not now at least.. Still, given Europe/USA situation who knows what it will happen.. – Gevorg Sep 20 '11 at 2:52
  • Gold might really break $2k.. Different thoughts about agriculture and food related investments though (farmland, cattle, etc), especially if gold bubbles and leading economies keep doing bad in the short/medium term. "If you can eat or wear it, invest in it"... Long term 3 factors might drive food prices up instead: 1) Global warming and weather anomalies; 2) 9 billion people in the planet by 2050 (and then more); 3) Increasing role of biomasses in the renewable energy sector. Just some thoughts... – Gevorg Sep 20 '11 at 3:04
  • Just watched: A documentary about the future of food that may have serious implications on more important things than investing: thefutureoffood.com/onlinevideo.html – Gevorg Oct 9 '11 at 23:51

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