However, the author failed to look at allocations to commodities in the proper context. Here's how you should look at commodities and why the academic evidence favors adding an allocation.
The issue of whether you should include an allocation to commodities in your portfolio is one of the most hotly debated topics among investors, advisors and even academics. Those that argue against the use of commodities generally show evidence such as this. These returns are for the period January 1991-June 2009.
|Annualized Return||Standard Deviation|
|S&P 500 Index||7.9%||16.2%|
|MSCI EAFE Index||5.2%||18.3%|
|Five-Year Treasury Notes||6.6%||5.6%|
|20-Year Treasury Bond||8.7%||10.2%|
So let's look at how the addition of a small allocation of commodities impacted the risk and return of a portfolio, using the same time frame as before:
- Portfolio A holds 60 percent stocks (36 percent S&P 500 Index/24 percent MSCI EAFE Index) and 40 percent Five-Year Treasuries.
- Portfolio B takes 5 percent from our equity holdings and adds an allocation to the S&P GSCI Index.
- Portfolio C shifts the fixed income allocation to 20-Year Treasuries.
|Annualized Return with Quarterly Rebalancing||7.2%||7.2%||8.2%|
|Annualized Standard Deviation||9.2%||8.6%||8.7%|
On Friday, we'll take a look at further evidence for including commodities in your portfolio. Also, you can check out the chapter on commodities in my book The Only Guide to Alternative Investments You'll Ever Need.