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Asset allocation quilt – the winners and losers of the last 10 years

After a bruising 2022, it’s time once again to take refuge under our asset allocation quilt. This colourful data duvet ranks the main asset classes (and sub-asset classes) by annual return over the last decade. The resulting patchwork of changing fortunes is a wonderfully intuitive way of illustrating how difficult it is to predict investing’s winners and losers in advance. 

The merest glance at the crazy clash of pixels reveals that any asset’s claim on the top spot is about as durable as the average K-pop star’s career.

But despite the explosion-in-a-Lego-factory vibe, the asset allocation quilt does have something to tell us about real diversification and its limits.

Let’s pull back the covers!

Asset allocation quilt 2022

Our updated asset allocation quilt is shown below.

The chart ranks the main equity, bond, and commodity sub-asset classes for each year from 2013 to 2022 from the perspective of a UK investor who puts Great British Pounds (GBP) to work:

The asset allocation quilt is a table that shows the annual returns of the main asset classes over the last 10 years.
  • We’ve sourced annual returns from publicly available ETFs that represent each sub-asset class.
  • The data is courtesy of justETF – an excellent ETF finder, screener, and portfolio building service.
  • Returns are nominal1. To obtain real returns, subtract 3.2% – the average UK inflation rate 2013-2022 – from the nominal figures quoted in this article.
  • Returns take into account the Ongoing Charge Figure (OCF), dividends or interest earned, and are reported in pounds.
  • Again, because readers are overlooking it – these are GBP returns. So if you’re a UK investor in the US, for instance, you did better than the S&P 500 index with your fund, because the pound weakened versus the dollar. (We’ve written more about such currency risk).

Changes from last year’s 2021 asset allocation quilt

We’ve added two bond sub-asset classes this year: 

  • Intermediate maturity US Treasuries
  • Long maturity UK gilts

It may seem odd to include more bond types after a disastrous year for debt. But I’d argue that a time of scorn is precisely when we need a deeper understanding of our antagonist. 

I’ve put US Treasuries in because they may offer superior diversification for UK investors in an era when the dollar is a safe-haven currency, and gilts are losing their lustre. (Political risk, anyone?)

That’s the theory, anyway.

The strategy depends on sterling dropping against the dollar whenever there’s a big dust-up on the global stage. Should that happen on cue, then a UK investor in US Treasuries can add currency gains on top of the government bond bounce we’d always hope for when equities wilt.

However – if the pound rose instead, then currency losses could undermine US Treasury returns at the very moment you want them to prop up your portfolio.

So holding un-hedged foreign bonds is not without risk. And indeed the unwelcome potential for an additional dollop of pain from such currency moves is precisely why traditionally we’ve always been advised to hold bonds in domestic or currency-hedged flavours.

What’s the evidence supporting US Treasuries?  

Intermediate US Treasuries have outperformed intermediate UK gilts from a UK investor’s perspective during nearly every equity market correction or bear going back to the dotcom bust – the one exception being the 2011 August downturn. 

However, Treasuries made a bad situation worse during the 1994, 1990, and 1987 market slumps. 

In the case of 1987’s Black Monday Crash, US Treasuries would have heaped a double-digit loss on top of the stock market pain.

In contrast gilts were a +18% oasis of calm that year. 

So switching to Treasuries is a gamble. A currency bet that paid off again in 2022 mind you, as sterling’s woes meant US Treasuries only lost -4.5%, versus intermediate gilts’ -24% swan dive. 

The longer-term situation isn’t so clear cut. US Treasuries beat gilts over the last ten years. But UK government bonds have outpaced US govies over different timeframes. 

Still, the notion that Treasuries could be a super-diversifier is intriguing. Hence we’re patching them onto the asset allocation quilt.

As we often say about such things, you could do, say, half-and-half – as opposed to going all-in on swapping your gilts for US Treasuries.

Stitch this 

Long-dated gilts also get an invite to the asset allocation block party because they offer something different.

Okay, so this year’s -40% loss is the kind of different you can live without, I hear you cry.

But let me explain.

The long duration characteristics of long-dated gilts make them extremely sensitive to changes in interest rates. 

That property can make long bonds the best diversifier in your portfolio during a recession, when equities and interest rates both go into retreat. 

But we saw the dark side of the bargain in 2022. Rapidly rising bond yields rendered long bonds radioactive and nobody wanted to touch them.

Ironically, current bond yields – which have come about precisely because of the 2022 slump in prices – have recharged the asset’s ability to deflect the next stock market implosion.

We’ll keep an eye on them in the quilt from here.

The final change we’ve made is to drop European equities to make room for these bonds. 

One more row of violent checks felt unpalettable, so they’re gone. Sorry. Not sorry. 

A chequered past 

It’s hard not to notice on eyeballing the quilt that broad commodities and gold were the only asset classes you should really have wanted under your Christmas tree in December 2021. 

For broad commodities, maintaining decent exposure is problematic, however.

A broad commodities fund uses futures contracts to track a diversified basket of raw materials – oil, livestock, cash crops, industrial metals, that sort of thing. 

And I’d bet hardly any passive investors held those commodity future funds last year, because as the quilt shows they inflicted hideous losses on investors from 2011 to 2020.

Notice how their orange blocks mostly prop up the bottom of the table – barring a brief Whac-A-Mole leap out of their hole in 2016. 

Most investors would have thrown in the quilt. I mean the towel!

However commodities did finally do their diehard fans proud in 2021 and 2022, with two big performances that almost make them look like worthwhile portfolio additions. 

Almost… but not quite. Their 10-year annualised return is still negative after inflation. 

2022’s commodities performance is akin to an expensive striker who’s essentially useless – but he came off the bench once, scored an absolute screamer, and won a famous victory. 

So you keep them on in the hope they’ll do it again. But mostly they just suck your soul. 

In investment terms, that translates as commodities delivering bond-like returns but with equity-style volatility over the long-term.

Or, to put it crudely: occasionally they’re brilliant but typically they’re terrible.

And the maths of that doesn’t compound into great returns over the long years.

Golden brown

Gold is potentially a more palatable alternative. Its position on the asset allocation checkerboard looks like the proverbial game of two halves. 

Gold is either vying for Champions League places, or flirting with relegation. 

Like its broad commodity cousin, then, gold is a diversification wild card. 

It exhibits near zero correlation with equities and bonds (i.e. anything could happen), it has poor long-term expected returns, but – as in the 1970s and in 2008 – in 2022 gold provided portfolio relief when other asset classes could not. 

Shady business 

Another bamboozler from the weird world of asset allocation is that inflation-linked bonds were a disaster just when you’d expect them to shine. 

Sadly, the inflation-linked bond funds that many people hold had quite high durations going into 2022. That left them vulnerable to interest rate rises. (We raised the alarm in 2016, but not loudly enough in hindsight.)

The pace of interest rate rises in 2022 hit these funds with capital losses that overwhelmed their inflation defences like a storm surge deluging a sea wall. 

So while investors should benefit from increased yields in the aftermath, the enduring lesson of 2022 is that protection is best sought via carefully-selected individual index-linked gilts, or short duration inflation-linked bonds.

Sadly, other useful inflation hedges are in short supply.

King of the swingers

Perhaps the swingiest asset on our disco dancefloor are the FTSE 250 equities. 

The UK’s mid cap stocks have been up and down like the Assyrian Empire as Eric Idle would say. 

A year of table-topping glory is invariably followed by 12-months of mediocre-to-dismal performance. 

What’s going on at the UK’s medium-sized firms? Does the workforce do one year on, one year off? 

My deeply boring rational brain is droning on about it [nerd voice]simply being an artefact of the timeframe and valuation multiples de-rating, actually…”

…whereas the superstitious, pattern-spotting side of my nature is already banking on 2023’s double-digit rebound. What could possibly go wrong?

Intriguingly, property is similarly whipsaw-y. 

It’d be interesting to see if a rebalancing bonus could be achieved by selling out of either asset after an exceptional year and buying in following a poor year. 

Passive investing luminary William Bernstein has previously advocated such a strategy with super-volatile gold mining stocks. 

But that’s enough naughty speculation for one year!

Full spectrum response

Take notice of how the multi-coloured mayhem settles into a more familiar array when viewed via the rightmost ten-year annualised returns.

  • Bonds, gold, and commodities are at the bottom of the heap, just as we’d expect.
  • Equities sit atop the ten-year column as prime slabs of capital really should.

But the divergent outcomes among the different equity sub-categories shows why we need all sorts of assets in our mix.

Long-term investing is a game of sliding blocks. The S&P 500 could easily trade places with the Emerging Markets or the FTSE 100 in the next decade.

Perhaps that’s why the asset class that makes the most sense is global equities. It hasn’t once reached No.1, but it’s still showing an amazing 10-year return. 

For sure, global trackers lag the US for now. But there have been many decades when the S&P 500 has been surpassed by the rest of the world. 

US equities just notched their lowest position yet on our ten-year asset allocation quilt, so perhaps they are finally coming off the boil. 

Still, the common thread here is expected asset class behaviour.

Over time equities of all stripes should do relatively well but we don’t know how the sub asset-classes will stack up. Meanwhile, the other asset classes are there to patch up the holes when bad years for equities leave our portfolios needing stitches.

Best to have a bit of (nearly) everything.

Maybe we should call such a portfolio an asset allocation pick-and-mix?

Take it steady,

The Accumulator

  1. That is to say they are not adjusted for inflation. []
{ 37 comments… add one }
  • 1 JimJim January 19, 2022, 12:03 pm

    Nice to see a British version of this, and timely with the article here about the 250… https://www.ukdividendstocks.com/blog/is-the-ftse-250-expensive-at-three-times-its-dot-com-peak
    I am fortunate that I have ridden the 250 wave over the last 10 years with an unbalanced portfolio weighted towards it, and equally unfortunate in my lack of faith in the S+P.
    I can’t complain.
    Thanks for the quilt, I hope it becomes a regular yearly feature.

  • 2 Chiny January 19, 2022, 12:20 pm

    Fascinating stuff and I expect I’ll return to it nervously, every time I have some funds that need investing.

    I’ll echo the earlier poster in hoping this becomes a January feature – appreciate the work involved.

  • 3 James_Smith January 19, 2022, 12:29 pm

    Nice to see a British version,
    That one is interesting as well https://www.bankeronwheels.com/the-long-game-historical-market-returns-2022-expectations/

  • 4 Attilio January 19, 2022, 12:45 pm

    Great summary!! Which Global Equities ETF you considered in your table?

  • 5 David C January 19, 2022, 1:38 pm

    Much appreciated, likewise.
    Intrigued by your comment that “in theory our asset allocation should align to the world economy”. Don’t most indexes, and hence most trackers, align to the world’s stock-market capitalisations? Which is not the same thing as the economy at all, although perhaps in theory it ought to be. I assume that a big chunk of China’s economy is outside quoted stocks, with enterprises owned by state bodies, cities etc. The UK’s National Health Service is a big chunk of GDP, but not investable (yet!). And there are grumbles about increasing chunks of US industry being owned privately where the retail investor can’t get a piece of the action. But I have no idea how much any of this matters.

  • 6 Al Cam January 19, 2022, 5:54 pm

    Thanks for this nice UK variant of the chart; appreciate the work taken to generate it!
    Re: “Indeed US equities achieved a podium place in nine out of ten years.” Is it not rather eight from ten?

  • Mogul
    7 The Accumulator January 19, 2022, 6:43 pm

    @ David C – You’re right, geographic market-cap trackers are aligned with stock market capitalisations rather than economic punch. The US and UK are both over-represented by stock market capitalisation. It’s impossible to align with the real economy but there are some interesting articles out there on how you might go about it.

    @ Attilio – It’s iShares MSCI ACWI UCITS ETF (Acc)

    @ Al Cam – cheers! And you’re spot on about 8 out of 10 years. In my defence, I was going colour blind by the time I finished the table 😉

    @ James and Jim Jim – thank you for the links. + Chiny – Yes, think this will be an annual feature. I’ve done the hard work now getting the first 10 years worth of data.

  • 8 Mousecatcher007 January 20, 2022, 4:01 pm

    A very useful graphic. Thank you.

  • 9 MrOptimistic January 20, 2022, 5:39 pm

    17% annualised over 10 years from the S&P 500. Jeez, that’s what overthinking has cost me.

  • 10 The Investor January 20, 2022, 7:57 pm

    @MrOptimistic — At least you recognise it rather than obfuscating, or prophecizing an 80% crash to make things ‘right’.

    That’s a credit to you. 🙂

  • 11 Grumpy Tortoise January 21, 2022, 8:34 am

    A fabulous infographic TA and very useful for novices such as myself. I wonder what a Cash category would look like over a similar 10 years?

  • Mogul
    12 The Accumulator January 21, 2022, 9:15 am

    Thanks Grumpy. Cash would be a nice baseline to have in the table. I thought about doing it using some kind of money market fund or ultra-short bond ETF. I’d guess it’d be above commodities, somewhere around gold.

  • 13 Zero Gravitas January 21, 2022, 12:41 pm

    Interesting that the domestic focused FTSE250 has done so well over ten years.

    Beating everything outside of the US despite some large economic shocks.

  • 14 David C January 21, 2022, 5:50 pm

    1% wouldn’t be a completely terrible approximation as a baseline for cash over the last ten years. In most individual years you could have done worse, but annualised over the 10 years almost anything would have been better. Published statistics for “average interest rates” are pretty useless as a comparator (why would you leave your money in an average account?). so I wish I had more accessible records for my “shopping around the building societies, with judicious use of regular savings accounts and fixed rate cash ISAs” approach, but I reckon 2-4% pa for up to 2015 or 2016, and 1-2% since would be in the right ballpark (I think it was “funding for lending” that really killed retail savings interest rates, not the post-GFC base rate cuts). So yes, I agree with “somewhere around gold” (and better than money-market funds – at least, mine has been returning 0% – before platform charges).
    Incidentally, on reflection, “in most individual years you could have done worse” seems like a good argument, if you needed another one, for a chunky cash buffer if you’re decumulating.

  • 15 NewInvestor January 22, 2022, 9:33 pm

    Thank you for this. Is there any particular reason why global small cap (or US small cap) as sub-asset class is not shown?

  • 16 ka February 4, 2022, 8:54 pm

    REITs global or UK? thanks

  • 17 The Accumulator February 4, 2022, 9:54 pm

    @ new investor – just had to draw a line somewhere 🙂

    @ Ka – global reits

  • 18 D January 10, 2023, 2:24 pm

    Fascinating graphic TA, thank you.
    I did wonder how an equivalent graphic in local currency would differ but on reflection perhaps a USD equivalent would be a) possible to generate (e.g. swap VWRL for VWRD etc) and b) more informative. I’ve got in the back of my mind how the post-war GBP/USD has juiced returns for UK investors holding US assets.

  • 19 Trevor January 10, 2023, 2:43 pm

    I have seen equal weight funds like RSP which stacks up well against SPY (as per https://einvestingforbeginners.com/equal-weight-sp-500-etf-ansh/) but RSP is equal weight companies, which still has a skew of a larger % in technology;
    Information Technology 15.04
    Industrials 14.45
    Financials 13.33
    Health Care 13.12
    Consumer Discretionary 11.04
    Consumer Staples 6.89
    Real Estate 6.21
    Utilities 5.63
    Materials 5.47
    Communication Services 4.53
    Energy 4.29

    Using the quilt numbers, it would be interesting to see the results of an equal weight sub-asset portfolio, rebalanced equally at the end of each year.

  • 20 Hari January 10, 2023, 3:09 pm

    Perhaps a contrarian buy signal for European equities…

  • 21 The Investor January 10, 2023, 3:30 pm

    @D — Well you have to eat returns in your currency of choice (or a mix). I know investors who measure their returns blended over a basket of currencies because they live a very peripatetic lifestyle for example. A scant handful try to track returns in special drawing rights. But 90% of Monevator readers are UK based and GBP returns are what matter, and most of the rest are US based, where their own USD quilts abound (one reason we did a UK version).

    Local returns in local currencies are interesting academically but they are not much practical help to an investor I’d submit. Even if you think they may tell you something about the future performance, remember these things are correlated with equities. For example currency weakness may boost local share prices in a local currency because it does a lot of exporting and listed exporters become more competitive. That doesn’t mean it’s a bad idea to invest, but you could for example pile in, then see the currency strengthen on economic growth (good when translated back in to GBP) but that in turn then de-rates your local investments because the exporter becomes less competitive again!

    Of course this sort of thing happens over the long term (and inflation looms large in the maths/impacts, too, with currency appreciation/depreciation) not over a year or two.

    @Trevor — Equal weighted funds usually outperform because they have more small cap exposure I believe.

    @Hari — I thought *exactly* the same thing, but decided not to burden @TA with my active speculations…

    [Edit: Note, especially to @D who has unfortunately subscribed to comments — my first reply was wrong, I banged out the wrong outcome of the currency/competitiveness roundabout! Have tried to expand more clearly/correctly.]

  • 22 Seeking Fire January 10, 2023, 3:34 pm

    Great article.

    I’d also recommend looking at the US angle that came out quite recently.


    Some observations from my perspective

    – REITS are not a great diversifier at all. Worth owning as part of your overall allocation to risk assets, for most people through an index tracker. But I struggle to see any benefit in a oversized holding. In times of stress they seem to behave like super volatile equities. Same happened in 2008. Note very different to owning real estate physically, which comes with its unique set of opportunities and challenges

    – Inflation hedge. Well there isn’t a practical one is there from this set? There are asset classes that seem to do better than others – cash, commodities, gold but their long term holding costs versus other risk assets means your essentially paying expensive insurance. Commodities is the worst of the lot.

    – Interest vs inflation. The trouble is for many asset classes except those with zero duration in times of inflation the negative impact of interest rate rises to counter inflation swamps any inflationary benefits of assets (e.g INLG, $TIPS, to a lesser extent reits per above).

    – Equities are not a good inflation hedge. period. They are also the best chance most people have of beating inflation long term. period.

    – 10 years is not long term. S&P 500 could be bottom of the pack quite easily in next 10 years given elevated CAPE etc

    – Bonds really should do better this year. But a negative real return for global inflation linked bonds over ten years is not great at all given why most people invest in this class

    There’s a lot to be said for investing in a global tracker with cash for liquidity and doing something else with your time!

  • 23 SemiPassive January 10, 2023, 3:54 pm

    Just to be more annoying than Hari, my favoured asset sub classes to outperform over the next decade relative to S&P500:
    European equity income, Asian and EM equity income, investment grade corporate bonds (US and UK), US junk bonds, EM $ denominated govt bonds.

  • 24 mr_jetlag January 10, 2023, 4:40 pm

    Gorgeous quilt, although it took awhile for my brain to recontextualise away from Red Bad / Green Good and focus on the placement of the squares instead. Maybe a little graphic on the side showing the Y axis would help. Alternatively, once your 10 year rankings get updated you can then colour grade the different asset classes from best to worst – not as if we’d remember that eg. Gilts were green last year.

  • 25 xxd09 January 10, 2023, 5:59 pm

    Great work!
    It was the Callan chart of various US stockmarket investments returns that I found many year’s ago on a Vanguard Diehard/Bogleheads blog that finally convinced me that I knew nothing!
    Presumably where you got your Quilt idea from?
    Apparently Global Equities and Global Bond (hedged to the pound) index trackers were my only requirements
    Leave well alone to compound
    Some cash for 2-3 years living expenses and that’s it
    Worked-so far!

  • 26 Ben January 10, 2023, 10:51 pm

    Assuming the global equities ETF includes the US, which would skew it significantly, the quilt shows how much the US tech bubble has affected the last decade. It’s deflated a bit as a result if interest rate rises, but there’s still a lot of air in the bubble.

    I’ve no idea what will win in the next decade but bonds look a lot more attractive now than a year or two ago.

  • 27 Naeclue January 10, 2023, 10:52 pm

    Just reinforces my belief that the best thing to do is buy the global equity tracker, then adjust risk by holding FSCS protected cash deposits at the best rates available (or gilts to maturity).

    – Simple
    -You will never find yourself at the bottom of the chart
    – Helps to protect you against FOMO
    and you own misguided belief that you can predict what is going to outperform

  • 28 mr_jetlag January 11, 2023, 2:49 am

    @Naeclue – agreed, and along with that, limit your main portfolio updates to quarterly or even semiannually. Although my VWRP holdings have been up and down, what they haven’t been is bottom of the table – meanwhile after a nice run up my “play account” for naughty active investing is currently down around 20%. Woe, woe – except it inoculates me from doing anything “creative” with my allocations. I’ve mentioned before I’ve started holding the local equivalent of gilts here in SG. Let’s see if that further stabilises the ship – it seems the forecast is for more stormy weather in 2023.

  • Mogul
    29 The Accumulator January 11, 2023, 9:38 am

    Ha, yes, I expect hedge funds around the globe are loading up on European equities as we speak.

    I’d like to put corporate bonds in the table I think, and multi-factor equities, but I’m running out of colours!

    @ Mr jetlag – nice idea about the key. I suppose the 10-yr returns fulfil that function but they’re on the wrong side.

    @ Seeking Fire – I broadly agree – there isn’t a worthwhile inflation hedge if you’re an accumulator – assuming inflation is brought under control relatively quickly. As a decumulating retiree the ‘insurance’ premium may well be worth paying to avoid getting ravaged by 1970s scale inflation. The perfect instrument is index-linked certificates – which of course we can’t get anymore – though lucky US readers can still buy I bonds. Failing that it still seems worth looking into ladders of individual index-linked gilts – depending on the price you’d have to pay.

    Re: commercial property – I wonder what we’d say if it had just had a great decade rather than a dismal one. When I eyeball property against global equities across the table – it’s definitely doing something a little different. Only once in the decade did that work out well however – 2014 – when property returns were double global equities. The same thing happened in 2012 too – the year that’s just dropped off the quilt.

    There’s no inherent reason for property to be so poor – except IIRC valuations were extremely high within a couple of years of the Credit Crunch. And the pandemic hasn’t helped.

    I think you’re spot on about property being no diversifier at all in a serious bear market. The two asset classes are highly correlated and there are academic papers out there that show property and equities fall like rope climbers tied together during a crisis.

    I still have some hopes for property though as an equity diversifier rather than a portfolio diversifier and perhaps it’ll mean revert after recent pummellings.

    @xxd09 – yes, the Callan chart is the first ‘quilt’ I remember seeing. I think they called it the periodic table of investing, which I loved.

  • 30 ChesterDog January 11, 2023, 3:20 pm

    Interesting (if naughty) to compare annualised returns for some active funds over the same timescale.

    From Trustnet data, the two UK biggies: Fundsmith Equity 15.9%, and Scottish Mortgage investment Trust 17%.

  • Mogul
    31 The Accumulator January 11, 2023, 4:24 pm

    Very naughty. Bad Chesterdog 😉

    A great comparison would be if we picked 10 different active funds someone tipped a decade ago and made a quilt from their fortunes – for better or worse.

    There is a piece by Greybeard somewhere on the site that includes a list of investment trusts he liked the look of many moons ago.

    I looked up some of them last year to see how they’d done since. They were all over the shop. Some big winners in his list but some big losers too.

  • 32 The Investor January 11, 2023, 5:21 pm

    @Chesterdog @TA — My mum set up an investment trust portfolio with two equal sized subscriptions in 2012 and 2013, which was invested with my guidance into various UK equity income trusts. The idea was to create something with a modest portion of her wealth that might do better at providing an income versus inflation than keeping it all in cash, over the longer-term. As things turned out though, the dividends were just reinvested. I directed a bit of modest trading over the years (maybe 10 swaps from one trust to another over the decade).

    Messing around with our calculator suggests a rough and ready CAGR of 8%, which I think is much more representative than picking two of the best performing UK funds of the past decade (for a while it wasn’t even close with SMT, but it’s since retrenched markedly).

    Some money was taken out to pay for things blowing up (a car or a boiler or something) a few months ago and it isn’t unitized, so it’ll be harder to stab at the CAGR from here.

    Needless to say she would have done much better in a global tracker in hindsight (about a 14% CAGR) but as I say she thought she wanted some sort of income at the start. 🙂

    It’s been an educational little portfolio for me I must admit. And lately like most UK stocks its been hugely outperforming global equities, so maybe the reversion is on! 😉

  • 33 Al Cam January 12, 2023, 1:20 pm

    @TI (#32):
    Great story – IMO real world stuff is always interesting to read. What caught my eye was that: ‘she thought she wanted some sort of income at the start’. Would you be good enough to say a bit more about this and any other lessons?

  • 34 The Investor January 12, 2023, 1:35 pm

    @Al Cam — Afternoon 🙂 I might write about it sometime, but don’t want to derail this thread further and I typically have to try to stretch my personal input into posts that reach many rather than replying in depth to individual comments for the sake of having time to work and sleep 😉

  • 35 Sparschwein January 12, 2023, 11:38 pm

    Nice work, it’s very interesting to see this broken down in GBP.

    If anything, the poor run of commodities during most of the decade should have made them *more* interesting… unless one was working from the active prediction that disinflation will last forever.
    Volatility really isn’t a problem either as long as it is uncorrelated with the rest of the portfolio. Aggregate commodities have a low correlation with the stock market.

    The problem with commodities is how to invest in practice. Commodity ETFs are a funny business, they depend a lot on the shape of the futures curve and can deliver much lower returns than the index they are supposed to track. I found this all too complicated and settled on a chunk of commodity stocks instead. Using a mix of energy, mining and agriculture sector ETFs. It’s less than ideal and comes with a higher correlation with the overall stock market, but worked ok-ish last year.

    Has anyone looked into roll yield optimised commodity ETFs (iShares ROLL and such)?

  • Mogul
    36 The Accumulator January 13, 2023, 9:19 am

    @ Sparschwein – all excellent points. I’d add the volatility of an uncorrelated asset shouldn’t be a problem except that it may well be *psychologically*. The psychic scream that reverberates around Monevator when a major asset class has a bad few months never mind a bad decade makes me think that only a hardcore could live with an asset that inflicts years of misery before hitting pay dirt.

    A losing position grinds people down. Sticking with it requires fortitude and faith. Interestingly, this is how Naseem Taleb used to trade and IIRC he struggled to convince his management that it would work.

    I think I might take up your challenge on investigating the next generation of commodity ETFs. I’ve looked into commodities in depth but not written about it on Monevator. I kinda got the impression nobody was interested. Not that that normally stops me!

    Three things have kept me out of commodities:

    Underlying problems with commodity futures funds as you mention.

    The balance of the academic research I read was against including commodities in a diversified portfolio.

    I could use gold to do the job: low correlations with equities and bonds, no structural problem with using index trackers to gain exposure.

  • 37 Sparschwein January 14, 2023, 3:26 pm

    @TA – thanks, I think it’s worth turning every stone to find better diversification. It’s a real problem for anyone who is concerned about stock market risk. The dispersion of outcomes is huge even over the very long-term, when calculated without the usual biases (this podcast was quite the eye-opener https://rationalreminder.ca/podcast/224 ). Bonds too are less reliable in real terms than commonly thought.

    Crude hedging with puts or VIX futures is just too expensive. If I had access to a good tail hedge like Taleb’s Universa, I’d go up to 90% in stocks.
    There is probably a way to do this buying deep OTM puts and selling calls – figuring this out would be a full-time project for FIRE times…

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