The recent commodities bear market – 2008 to 2020 – was like watching a faraway, failed state descend into chaos. Hard to understand, it went on for years, and all you really knew was that you didn’t want to go there. Hence I’d guess that many Monevator readers instinctively recoil from the very idea of commodities investing.
But ongoing research and long-term data pieced together by multiple teams of investing academics suggests that commodities have been unfairly tarnished.
What happened to the asset class in that slump is most likely explained by a terrible sequence of returns. Bad luck for commodity investors, but a perfectly standard manifestation of investing risk.
If that thesis is correct, then by ruling out commodities we make the same mistake as a risk-shy investor who has a lifelong aversion to equities because they came of age during the Great Depression.
The bigger picture – filled in by 150 years worth of investment returns – is that broad commodities deliver excellent results over time, can diversify equity / bond portfolios, and boast some inflation-hedging capability, too.
- Please read our commodities investing explainer for our intro to the asset class, how it works, and the drivers of return that make it profitable.
The ghost of futures past
The following long-run UK returns chart shows why commodities futures are worth a second look:
Data from AQR1, Summerhaven2, JST Macrohistory3, and FTSE Russell. May 2023.
Since 1870, equal-weighted commodities have delivered a surprisingly good annualised real return of 4.3%.
Meanwhile, UK equities paced ahead with a 5.3% return, while government bonds brought up the rear on 1.4%.
Investing returns sidebar – All returns quoted in this piece are real annualised total returns. That is, they’re the average annual return (accounting for gains and losses) realised in a given time period. These returns include the impact of reinvested dividends and interest, but strip out the vanity growth delivered by inflation that does nothing to boost your spending power. Commodities dollar returns have been converted to GBP4.
Equities’ stronger returns mean we could forget about commodities if all that was happening was that shares and commodities rose and fell in synchronicity.
But the chart above also shows that commodities wax and wane to a different beat.
They’re highly volatile, but the fact that they often perform when equities (and bonds) falter is central to the pro-commodities case
They’re also a potent diversifier because the record shows that they’ve delivered superior long-term returns compared to gold, cash, or bonds.
Reality check
Before we go any further, I have to deliver a reality check that takes the gloss off these results. (Although with that said it doesn’t undermine the nub of the issue: that commodities generate good returns – and otherwise unattainable diversification benefits – for a passive investor.)
The 150-year index shown above enables us to see the long-term pattern of commodity returns. But that index is very difficult to actually invest in.
That’s because the Summerhaven and AQR research teams behind the historical data reconstituted it as an equal-weighted commodities futures index.
This is a standard academic practice. It apportions the same weighting to every commodity futures contract included in the index.
However there’s currently only one broad commodities ETF that tracks an equal-weighted index – and it excludes agricultural products.
The majority of commodity indices weight their constituents by world production quantities and / or trading volume.
This method is intended to represent the global economic significance of each commodity type. (Just as equity indices represent firms according to their market capitalisation.)
The issue is that production and liquidity-weighted indices typically underperform their historical equal-weighted counterparts.
So to ensure we stay firmly grounded in the real world, I’ll only use data from historically investable commodities indices for the rest of these articles.
Happily we have just such an index going back to 1933, thanks to the forensic efforts of Summerhaven’s research team. They published the data alongside their paper The First Commodity Futures Index of 1933.
Their reconstruction of the Dow Jones Commodity Index can be directly linked to the contemporary Bloomberg Commodity Index, which is tracked by some of the largest ETFs in the space today.
Do long-term investable commodity returns stack up?
Thankfully, still yes. Here’s the chart:
Data from Summerhaven5, S&P GSCI TR, BCOM TR, A Century of UK Economic Trends, and FTSE Russell. May 2023.
The annualised return of commodities is 4.5% versus 5.5% for UK equities over this 89-year timeframe. Bonds dawdled along at a paltry 0.85%.
Happily, aside from confirming that investable commodities deliver very handy returns, the chart also demonstrates that commodities often soared when equities stumbled.
You can see commodities spike as equities sold off during World War Two, again in the early 1950s, and incredibly so in the stagflationary ’70s.
The same happens in reverse, too. Equities did the heavy lifting when commodities crashed in the aftermath of the Credit Crunch.
How do commodities help as a portfolio diversifier?
The next chart shows how the main diversifying asset classes performed in years when equities were down, from 1934 to 2022.
Even at a glance, the cyan bars tell us that commodities sometimes spectacularly outperform everything else.
That’s true in 1939 and in the post-war years of 1947 and 1949. It happens again in 1973, during the first leg of the UK’s worst-ever stock market crash, the opening innings of the dotcom crash in 2000, and most recently in 2022.
There are also times when commodities are the only asset class that registers a positive return, while the others burrow into the ground.
Indeed, commodities are the best asset in the portfolio 32% of the time. That’s a record only bested by cash’s 34% score. And cash earns pitiful long-term returns by comparison.
Yet the fact remains that commodities can be a difficult bedfellow. They made portfolio returns worse in 42% of the years examined in our chart above. (Of course this also means they improved portfolio returns 58% of the time…)
Commodities won’t always bail you out. Sometimes they’ll make you rue the day. But there have been crises when they were the only thing that worked.
We’ll examine how much commodities improve overall portfolio performance across the entire 89-year timeframe in a future post in this series.
Commodity correlations
A correlations asset class matrix can help us assess the diversification benefit of commodities over different periods. An effective diversifier registers low positive or negative numbers against the other main asset classes.
Asset class returns correlations: annual returns 1934-2022 (inflation-adjusted)
| Commodities | UK equities | Gilts | Cash | Gold | |
| Commodities | 1 | -0.11 | -0.16 | 0.05 | 0.37 |
| UK equities | -0.11 | 1 | 0.39 | 0.08 | -0.21 |
| Gilts | -0.16 | 0.39 | 1 | 0.29 | -0.05 |
| Cash | 0.05 | 0.08 | 0.29 | 1 | 0.04 |
| Gold | 0.37 | -0.21 | -0.05 | 0.04 | 1 |
Gold data from The London Bullion Market Association and Measuring Worth. Cash is UK Treasury Bills data from JST Macrohistory and JP Morgan Asset Management. Other assets as per previous charts. May 2023.
Quick correlation recap:
- 1 = Perfect positive correlation: when one asset goes up so does the other
- 0 = Zero correlation: the two assets being measured have no influence upon each other
- -1 = Perfect negative correlation: when one asset goes up, the other goes down
On this measure, commodities look like an excellent diversifier. The asset’s slightly negative correlation with equities and gilts means that it will sometimes spike when they stall or fall.
Of course this also means that commodities can hold a portfolio back when shares and bonds are steaming ahead. But on balance, the historical record shows the asset class is a net positive.
One of the exciting things about these correlation numbers is you rarely see other assets produce a combination of numbers that gel so well with equities and bonds and deliver strong long-run returns.
By way of contrast, gold’s weak results over extended time periods (and the lack of a strong economic rationale for decent expected returns in the future) make me nervous about owning significant quantities of the yellow metal.
Most of us buy into the idea of equity and bond diversification – even though they’re relatively highly correlated, and thus likely to be less effective diversifiers at times.
Once again, it’s the combination of strong positive returns and low correlations with equities and bonds that make commodities worthy of serious consideration.
2008-2020 be damned!
Well, maybe…
Commodity drawdowns and crashes
I still can’t help being scared by that horrendous -66% commodities drawdown lasting from June 2008 to April 2020.
Other lowlights include a 20-year bear market that dragged on from 1951 to 1971. And another -62% beasting that ravaged commodities from the end of 1974 to the beginning of 1982.
Overall there are several lost decades to wince at. Especially if we go back to the 1870s via the equal-weighted index.
By the way, don’t forget that these figures are real returns. Most commentators will talk about crashes and bear market recoveries in nominal terms – a much gentler standard.
However it’s my duty to tell you that commodities investing is no easy ride. Although historically they’ve been a touch less volatile than equities.
On that note, it’s important to remember that all this and worse has also happened to the other asset classes we stake our future wealth on.
UK equities caved -79% from 1972 to 1974, for instance. The UK’s worst bond market crash also plunged to -79% depths, from 1935 to 1974. Gold suffered a near 20-year bear market between 1980 and 1999.
Nothing is ‘safe’.
If commodities still give you the willies, I can only say I’m right there with you.
They’re an unfamiliar asset class that works in an arcane way. And we’ve just lived through one of the worst commodities drawdowns on record.
None of that helps my rational self override my emotional self.
Which begs a serious question…
Are commodities a broken asset class?
Was the 2008 to 2020 losing streak just a bad bear market, or did something fundamentally change to impair the future fortunes of commodities?
To answer this question, let’s bring in the big guns. Namely the venerable financial academics Dimson, Marsh and Staunton (hereafter DMS).
DMS looked at precisely this question as part of their commodities investing chapter in the Credit Suisse Global Investment Returns Yearbook 2023.
A particular concern is that the launch of commodity index trackers shortly before the Global Financial Crisis – and the concomitant flood of institutional investment capital – might have led to a permanent reduction in the historical advantages of the asset class.
DMS highlighted three possible dangers associated with the ‘financialization’ of the relatively small commodities market:
First, inflows could have lowered the risk premium through the increased competition in the provision of insurance to hedgers. Second, because institutional investors hold portfolios of commodities and their allocation to commodities competes to some extent with that to other assets, their activities might increase the correlation between individual futures, and between futures and other asset classes. Finally, passive index investments might weaken the link between futures prices and fundamentals.
However, DMS then go on to survey the work of other researchers who’ve examined this question and say:
The authors conclude that, despite the high growth in commodity markets during this decade, the proportion of hedgers and speculators was broadly constant. Nor, in terms of risk and return, was this decade significantly different from the longer historical experience. Correlations between commodities rose, then fell again. The authors attribute this to the Global Financial Crisis, not financialization.
Citing additional evidence, DMS judge that:
It would seem quite wrong, therefore, to conclude that the risk premium from futures had disappeared simply because of the Global Financial Crisis drawdown in commodity futures that followed the publication of GR’s [Gorton and Rouwenhorst] research. This was a disinflationary and low inflation period, and, as we will see below, these are challenging conditions for commodity futures.
DMS go on to show that commodities tend to perform poorly during recessions and disinflationary periods, concluding:
The disinflationary decade following the crisis was a very difficult time for commodities. Many institutions capitulated, reducing or removing their commodity positions – before they turned useful again in 2021/22. It is harder for investors to stay the course in commodities than equities amid a comparable drawdown, given that commodities are less ‘conventional’. This can be a typical fate for a good diversifying asset.
Indeed, the academic trio believe that the commodities risk premium remains alive and well:
What risk premium should we expect from a long-run investment in a portfolio of collateralized futures? Ilmanen (2022) concludes that the best long-term, forward-looking estimate is the historical premium. He suggests that “a constant premium of some 3% over cash seems appropriate for a diversified commodity portfolio – though not for single commodities!”
Other researchers float that 3% excess return figure too as the average long-term return you would hope to gain over and above the interest rate earned on cash in the bank.
Vanguard’s 2023 commodities paper for instance employs an expected returns model to draw in data beyond the historical record. It proposes a highly finessed base-case estimate of a 2.85% future expected excess return.
Though it then hedges its bets by citing a range anywhere between 0.5% to 3%.
Where does this leave us?
It’s because I think we should all hedge our bets that I’m writing this commodities series in the first place.
I want to evaluate the evidence for and against as well as I can, especially as it’s an asset class with enough ifs, buts, and maybes to fill a comedy of manners.
Perhaps we need to move on from considering the strengths and weaknesses of commodities in isolation? After all, what really matters is their potential contribution as part of our properly diversified portfolios.
Let’s get to that in part three.
Take it steady,
The Accumulator
- Levine, Ooi, Richardson, and Sasseville. “Commodities for the Long Run.” FAJ, 2018. [↩]
- Bhardwaj, Geetesh and Janardanan, Rajkumar and Rouwenhorst, K. Geert. 2019. “The Commodity Futures Risk Premium: 1871–2018.” [↩]
- Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298. [↩]
- British Pound Sterling [↩]
- Bhardwaj, Geetesh and Janardanan, Rajkumar and Rouwenhorst, K. Geert, “The First Commodity Futures Index of 1933,” Journal of Commodity Markets, 2020. [↩]
Alternative investments ie not equities,bonds or cash are an interesting play for the amateur investor
Of course they are there to act as a diversifier to the standard amateurs portfolio of the big 3 ( equities,bonds and cash)
My conclusion (and John Bogle,s) was that the play wasn’t worth the risk for the ordinary investor -the returns were too variable ,the risks were too great and the costs were too high
I continue to read about alternatives -they are by definition much more exciting than equities,bonds and cash
For the expert professionals alternatives (commodities,gold etc) have a place
Once upon a time ,long long ago ,in a time far far away I held 15 Krugerands(Gold) for a few months but that was as close as I ever came
xxd09
Excellent piece @TA. Thank you for sharing your analysis.
Looking forward to the big reveal in Part 3 and to seeing whether or not the new 60/40 Global Equities/Intermediate Gilts portfolio becomes a 60/20/20 allocation to Global Equities/Equal Weighted Broad Commodity Futures/Intermediate Global AAA Bonds Hedged to Sterling.
Investing is always the same.
Quality companies + patience = wealth. Money is not made by degree of difficulty,or how complex things can be made to look,or how many studies you want to look at.Money is made from simplicity and the obvious.
A look at the Rio price from 1994 tells me it was $8.50 a share.BHP was $4 a share.
Leverage up by borrowing $12,500 and buy a thousand of each of them.You’ve probably made a million and more by holding and reinvesting dividends.Nobody did that then .Nobody has done it since.Nobody is going to do it in the future.They have all kinds of excuses not to do that,they keep telling themselves it has to be more complicated than that.Nobody means anywhere between 0 and 1000 people.Very few people have made a million from those 2 companies.Group think and fooling themselves always stops them making a million
BHP has been listed since 1895 on the ASX.After 5 or 10 years it was the 5th or 6th largest company.Over a century later it is the largest company.Every day the same excuses not to buy are used.Long term investing is one year,or until the last bit of news.The dividend was reduced,quick sell, the end of the world is here.
Money always goes to patient people.
If you google ASX mining index it should give you a brief 3 or 4 page history of the index and the accumulated returns over a period of years 10? 20? 30? ,I don’t know.The only miner I own is Fortescue metals, FMG : ASX.AGMs are strange,the man is a god to the very small group of shareholders that have held it long term.Perhaps a dozen.He goes around thanking the 2-300 shareholders that attend the AGM before it starts.
Thankyou for having faith in me and trusting me with your money.The share price has gone from 1 cent to $20.50 over the last 20 years.
The AGM from last November is up online,it will give you the nature of the man,and his plans for the future.Take it or leave it.
I initially used commodities as a diversify about 15 years ago when setting up a Hale style portfolio for my SIPP. Performance was underwhelming and I took them out. When I constructed my FIRE drawdown portfolio I did put a % back in which has worked well over the last 3 years. Having reinvested back in at a relative low it’s easier to hold a position. In the face of potentially decades long underperformance it’s harder to do (with rebalancing etc). Interesting article and review.
I think (as a still relatively novice investor) that there’s a risk of overdiluting asset allocations and breaking the KISS principle.
On one hand you have Lars Kroijer’s “Why a total world equity index tracker is the only index fund you need”.
On the other, you could be diluting your asset allocation with something like 60/10/10/10/10 equity/gilts/linkers/REIT/commodities.
Surely it’s the worst of both worlds to only hold small slivers of a bunch of asset classes?
My usual thought when some suggests owning commodities is: But I do own commodities. I have mining and oil & gas equities. (True no real agriculture – it’s hard to get into especially for UK investors. My last attempt turned up only an overvalued fish farming company I passed on.)
Okay equity in primary producers isn’t the same because:
1) When commodity prices spike it’s typically because the producers failed to predict demand (or supply interruption), are left scrambling to increase production, all bidding up fees for same subcontractors, and with delay. So they can’t cash in as much as a commodity owner
2) A severe economic crisis can bankrupt a producer even if they have valuable commodity in the ground
3) The existence of the futures market erodes the upside for producers (but lowers the downside too)
4) It’s way more capital light to own iron ore in the ground waiting to be extracted just-in-time(ish), rather than own shiny expensively smelted iron taking up expensive warehouse space
In conclusion I think the diversification comparison should be with commodity producers rather than the wider equity market.
It also looks suspiciously like the lion’s share of commodity returns since the 1950s have been due to oil? (With perhaps other commodities flattening the volatility. Or maybe I’m completely wrong, this isn’t my area). Given oil’s central position in the energy economy, and the central position of energy in the economy full stop, it’s no surprise it’s a fantastic inflation hedge. And it’s future is highly uncertain (already gas has probably overtaken oil in importance). Lumping it in with other commodities might therefore be risky. At least you want to make certain your commodity investments include all the potential key energy-related minerals of the future. Your uraniums and lithiums and all that jazz.
Thanks for the interesting follow-up article. The diversification benefits are clear. The question I am still struggling with is, are commodities futures investible in practice.
Some otherwise sensible authors (e.g. Bernstein in “Rational Expectations”) showed that commodities futures funds did much worse than their index over long periods, and concluded that they are not investible.
But maybe their analysis was off.
Do the charts and return figures here all include roll yield, which seems to matter more than spot prices?
Another issue with passive futures ETFs is that their roll is predictable, so that active investors can front-run them and skim off returns.
I hope the conclusion is that commodities futures ETFs are actually investible. They would make a much better diversifier than commodity stocks.
@ Sparschwein – yes, my numbers are total returns for commodities so include roll yield, interest on collateral, and influence of spot prices.
My initial look at BCOM ETFs with long track records is that they’re broadly in line with the index. I’ll do a more thorough analysis on this later in the series and also investigate the so-called ‘second generation’ commodity ETFs that are supposed to address the front-running issue.
Bernstein had less than 10 years of commodity ETF data to work with when he wrote Rational Expectations so I’m interested to update on this.
@ EJP – I agree there’s a risk of over-complication all though that’s very much in the eye of the beholder.
Even Lars doesn’t really believe you only need a total world tracker as a large part of his book is dedicated to government bonds and he goes on to talk about other asset classes you can add – but only if you want to.
Personally, it helps me to think about the risks I’m exposed to. I’m exposed to inflation so I want short-term linkers and this is also part of the reason I’m interested in the recent findings about commodities.
I’m exposed to recessions so I still want nominal government bonds.
I’m exposed to the risk that equities and bonds can underperform at the same time, especially during inflationary periods. I had come around to gold as a solution to that, but this evidence shows me that broad commodities is probably a better fit.
There’s nothing stopping me holding a chunky allocation in whichever assets I think best suit my situation. I’d be much less worried about inflation if I was a young investor because I’d rely on equities to beat CPI over time.
Finally, I’d either drop REITs or just make them part of my equity allocation. For example, if I wanted 60% in equities then any separate REIT holding would be part of that as the two asset classes are so highly correlated. Personally, I no longer see a distinct strategic role for REITS in my portfolio so, if I wanted to simplify, they’d be the first to go.
@ Roland – it’s in the next post but commodity producers look highly correlated to the wider market while commodity futures aren’t.
From my perspective, the lion’s share of my portfolio is in equities, so if commodity futures have a role, it’s as a diversifier to that weightier allocation.
Looking at DMS’ breakdown of individual futures contributions to the equal-weighted total return, oil was a significant factor but only from the 1980s on. Meanwhile, the spike in the investable index during the 1970s wasn’t due to oil futures outperforming during the oil crisis. They weren’t in the index at the time.
What I like about the longer-term view is that it enables us to see periods when oil was not a major part of the global economy (or the index) and also periods when oil was a drag on returns.
Either oil continues to play a significant role (which I suspect it will for at least twenty or thirty years) or it wanes in importance. However, the key to commodities seems to be the diversification potential of a broad basket of futures rather than reliance on any single one.
While your blog is correct,the general points in it are correct,I still think studies etc should not be relied on.Real life is real,as you have correctly pointed out,rational and emotional The emotional side always wins.Keep away from emotions.
At AGMs I often have a chat to CEOs,CFOs etc.The annual reports of these companies tell you the same thing.Stick to the plan and focus on that plan and nothing else,basically be rational.You bought the shares expecting it to grow,the emotional side tells you you want it to happen quickly,it doesn’t.The emotional side tells you to follow the crowd,constantly compare with whatever is fashionable,what does everybody else think I should do.What does the general study tell me to think.What wrong message does the financial industry constantly get me to buy and believe.
Now reality,I attended the Rio AGM in May this year. I asked a shareholder in my age group ( 70 to 80 ) to invite me in as a guest,he did,I thanked him,we had a chat for 5 mins,and then went in to the AGM and seperated .I didn’t know they had been around for 150 years,the board of directors were impressive.A brief history of the company,questions from all over the world within time difference constraints,all handled very well I thought.I thought an excellent AGM,the only drawback was the directors did not make themselves readily available after the meeting to chat with shareholders.The food was excellent,and catered for most dietary needs.
Reality again,the annual report tells me that there are 28,000 shareholders in the UK,and that’s it.Nobody buys shares ,the emotional side,you’ll lose all of your money,the risk is huge,it isn’t,the rational side.You are in total control of how much you lose just by hitting the sell button.
You have no control over the gains,you only have panic,greed and groupthink on that side of the ledger.
Back to the rational side the 30 year return on Rio has been excellent.I don’t think they have missed a dividend.The ASX chart is not very good,the basic line for growth and going back the increments are in $2 rises.Looking a bit harder today the chart goes back to 1993,so it would be 30 years,it looks to be January.The price is below the $10 mark,but no price below that as a reference,so call the base $10 in Jan 1993.
Random dates are by 2000 the price was $20 a share. By Jan 2009 it was $30 a share,take note of that date,by 2016 it was $50 a share.Today $113 per share.
Jan 2009 was around the bottom,or close ,during the GFC.That is all that registers with people,and studies.Low returns from RIO and high risk.RIO went from $130 a share at the high,to $30 at the low.Over the long term it went from $10 to $113 and didn’t miss paying a dividend,as far as I know,wonderful returns.Juice it up by reinvesting dividends and it is excellent.Nobody will ever do that for any company.
Don’t buy them,too risky.
How come everybody else isn’t doing that ?
Look at the last 3 months of company X,you have to buy them.
You didn’t rebalance,you have to rebalance,everybody knows that.On and on with emotional nonsense,and groupthink .
Two people will see completely different things,they are both right and they will never agree.People like doom and gloom.So in 14 years RIO has gone from $130 to $113 ,a disaster,studies prove it.
The optimist with experience that owned RIO at the time may have thought that drop is great,and bought at $50,well above bottom.They have a history of rising dividends but the dividends are volatile I don’t know,I have selected two points in time,come to that later.
The optimist gets rich,the doom and gloom mob get nowhere.RIO has produced excellent returns since 2009. Never buy shares in RIO say doom and gloom,and here is a study to prove it.
The two points in time are 10 years apart.The ASX chart gives you all the dividends for 10 years.Two dividends around 2013 are 93 cents and $1.20. The last two are $3.83 and $3.26.A large growth in dividends over that period.
Formulate the plan and stick to it.People will constantly tell you you must never borrow to invest,you’ll lose everything,you’ll be ruined.People would have happily borrowed $10K to buy a second hand car car in 1993.A good buy ,it looks good,low mileage,obviously been looked after,what a bargain,well done.
Borrow $10K to buy shares in RIO,or any other company,you’ll lose everything.
Rational or emotional make your own choice,I’m done
I should add that I gave RIO as it is not complicated as far as I know.
BHP is far more complicated and two points in time would be all I pick.That company is far more complicated than it looks for the last 30 years.
My general knowledge of BHP is the $4 stated and whatever it is today $44?.
The complication arises from spin outs from BHP in that 30 year period that I know of,there may be more.
BHP bought Western mining corp ( WMC, google it).This was then spun out as South 32.BHP spun out Bluescope steel,their rolled and extruded steel products division.Bluescope is now around $20 a share.Then as the largest oil company by far in Australia the oil assets were merged with Woodside,I think BHP shareholders were given shares in Woodside,I don’t know.
So one company may be 4 shareholdings now .
BHP,Bluescope steel,south 32 and Woodside.
To further complicate it WMC had an employee share purchase plan.The 1980s,I worked for them then and joined it.I think WMC spun out shares in Alumina,a joint venture between Alcoa and WMC and called world aluminium or something ( AWAP I think).I left WMC in 1989 or so and sold my shares in WMC and Alumina.From memory Alumina was sold at $6 each,and it is around $2 now,you’ll need to look.
So one share in WMC may grow to be BHP,Bluescope steel,south 32 and Woodside.I don’t know.The takeover of WMC may have been cash,or cash and scrip,or scrip,I don’t know.WMC were going through a lot of changes at the time in the lead up to the Japanese bubble bursting.They also adopted the Japanese just in time principle.That probably works great in Japan,but would have taken a long time to implement with a laid back Australian attitude.She’ll be right mate,leave it with me and I’ll get it done.
BHP could well be 5 companies that you have shares in now.Difficult to see in a general study with all the variations and errors that that can produce,but the general idea over the long term will still be roughly right.
To further complicate it these things are quoted in US$,then need to be converted to various currencies.
Keep things simple and avoid complication as much as possible.
Really interesting. Looking forward to the next in the series – scratching my head when it comes to BCOG, CMOD or WCOB, and which one to potentially go for and start a position in!
Very interesting post, looking forward for the next instalment.
I seem to remember you are planning to use Prime Harvesting, as are we.
I would expect to lump commodities in with stocks as it is a volatile asset, and then keep a fixed allocation within that group – perhaps 20%? We are still ruminating, but hope you plan to make some comments on that too.
Really interesting point, Martin. I’ll think on that. My instinctive reaction is that commodities doesn’t belong in the equities camp because its role in the portfolio is as a diversifier while stocks remain the growth engine. My next post shows a few sample portfolios. The impact of including commodities at the expense of bonds rather than equities was positive from an overall volatility perspective.
Considering the subject a bit more, if you use PH the first question is if you want to let commodities float up like the stock do or buy and sell depending on circumstances as with the bonds.
If you let them float, it can be done either lumped in with stocks or as a separate entity, i.e. you have PH of stocks and commodities separate.
If you keep them with bonds, you will be both buying and selling depending on stock markets, but the proportion of the portfolio will tend to shrink over time (I think!).
How it influences the initial bond/stock allocation I think is a different question.
These are just qualitative considerations, I have not done any modelling 🙂