Market Beat: Portfolio diversification with commodities
TRUCKEE, Calif. andamp;#8212; In 1983, Dr. John Lintner of Harvard University did a landmark study on the effects of including commodities in a portfolio as part of an asset allocation strategy. The results of his often-cited study were that by including commodities, an investor could achieve greater diversification and expect superior risk adjusted returns.In those days about the only way that investors could use commodities was either by having their own commodity futures trading account or by using what is known as a managed futures fund, where a professional trader makes the buy and sell decisions.Today investors, even small investors, can diversify with commodities by using ETFs, or exchange traded funds. By adding commodities to a traditional stock and bond portfolio an investor can get better diversification. There are ETFs today for virtually every commodity including gold, silver, oil, coal, natural gas, and agricultural commodities like corn, cotton, coffee and sugar. There are also funds which are broadly diversified across the agriculture industry so an investor can spread their commodity risk within one fund investment.In 2008, for example, the Sandamp;P 500 fell by 38.50 percent, while the gold ETF had a positive year, returning about 5 percent. Gold is considered to be a good hedge against inflation and can go up at times when the US dollar declines.A study by the United Nations Food and Agriculture Organization forecasts that the world population will grow to more than 9 billion by the year 2050. The population growth will come mainly from developing countries and will require a 70 percent increase in global food production to meet it. On a long term basis the demand for agricultural products will increase significantly.In 2012 the demand for copper and coal is expected to continue to climb although at a somewhat slower rate than 2011. Much of this demand comes from countries like China and India. Refined copper consumption is expected to rise by 6.4 percent in 2012. According to the Economist Intelligence Unit global demand for coal is forecast to rise by 4.3 percent in the coming year. Because the global population is forecast to increase and emerging economies are expected to keep growing, the consumption of commodities should continue to increase.Commodity prices can be quite volatile and caution should be used when investing in them. Even though the long term consumption story is viable, in the short term commodity prices can have some dramatic price swings and may not be suitable for all investors.Kenneth Roberts is a Truckee based Registered Investment Advisor. Ken has been in the securities business since 1992, has worked as a branch manager for a major Wall Street firm, and is currently a portfolio manager for Fusion Asset Management who specializes in target retirement and income producing portfolios. Information on his money management service can be found at http://www.fusiontargetretirement.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.