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We all know that precious metals are extremely volatile (high beta) and that commodities usually do not have a long-run real return (zero alpha). I currently have 1% of my portfolio invested in a "Precious Metals & Mining" index fund, which invests in companies that mine precious metals. As user662852 in the comments indicates, investing in the producers of a commodity isn't the same as investing in the commodity; however, their values are correlated. Precious metals are usually successful in market crashes and unsuccessful in market booms.

Is this sector (precious metals and mining) generating comparable returns to the overall stock market over the long run (i.e., around 9% annually)?

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    You are very risk adverse but not bothered by a 50% loss in your investments. That is a very big risk and contrary to your previous statement. – user9722 Jan 20 '16 at 22:02
  • Where do I say that I'm very risk adverse? – Wuschelbeutel Kartoffelhuhn Jan 20 '16 at 22:29
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    @WuschelbeutelKartoffelhuhn The phrase in your question "My risk aversion is very small" is an odd phrase. It reads to me like it must have read to George Renous that you are risk adverse, whereas the parenthetical comment suggest that you are not risk adverse (or have a pretty broad view of risk). – user32479 Jan 20 '16 at 22:37
  • "risk aversion is very small" - he is not risk averse. He is Ok with risk. – JTP - Apologise to Monica Jan 20 '16 at 22:48
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    Exactly. Highly risk adverse people try to reduce the uncertainty with deliberate effort. Those with low risk aversion do not. I don't see anything odd with it. Even if it were contradictory, I don't see how this post deserves all these downvotes. The risk aspect doesn't even have anything to do with the question. – Wuschelbeutel Kartoffelhuhn Jan 20 '16 at 22:55
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Metals and Mining is an interesting special case for stocks. It's relationship to U.S. equity (SPX) is particularly weak (~0.3 correlation) compared to most stocks so it doesn't behave like equity. However, it is still stock and not a commodities index so it's relation to major metals (Gold for instance) is not that strong either (-0.6 correlation).

Metals and Mining stocks have certainly underperformed the stock market in general over the past 25years 3% vs 9.8% (annualized) so this doesn't look particularly promising. It did have a spectacularly good 8 year period ('99-'07) though 66% (annualized).

It's worth remembering that it is still stock. If the market did not think it could make a reasonable profit on the stock the price would decrease until the market thought it could make the same profit as other equity (adjusted slightly for the risk). So is it reasonable to expect that it would give the same return as other stock on average? Yes.. -ish. Though as has been shown in the past 25 years your actual result could vary wildly both positive and negative.

(All numbers are from monthly over the last 25 years using VGPMX as a M&M proxy)

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    It has a 3% annualized return over the last 25 years, but it is reasonable to expect it might give 9%-10%? Is the 3% cherry-picked good->bad? Or is this a contradiction? – Joe Jan 22 '16 at 22:40
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    25 years was just the longest period of time I had data for. It's tough to say anything is cherry-picked when you are looking over 25 years. I'm willing to say it is reasonable to expect that the returns would be similar to other equity... but don't count on it. As for 9-10%, many people are arguing these days that with lower interest rates and a slower growing population that equity returns in general won't be as high as they were last century. Putting a 1% range on something that varies between -40% and +30% year-to-year is a tough thing to do. – rhaskett Jan 24 '16 at 1:11

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