[ QUOTE ]
[ QUOTE ]
* Commodities futures -- I think this is where the action has been, but I'm not sure we know much about the long term performance.
This paper notes that commodities futures have performed as well as stocks while offering extra diversification, but it's "only" 40 years of data. I believe this paper is considered to be very influential but I'm not an expert here. Interesting read in any case.
[/ QUOTE ]
This is really a seminal piece of research.
It explains why commodities futures, in the right dose, can reduce a portfolio's risk without significantly harming return.
Here's another article that tries to explain the concept.
How Worldly Is Your Portfolio?
[/ QUOTE ]
They cherry picked the end date. If they had finished the study as little as a year or two earlier, the total returns would have been cut substantially. The SPCI-G (S&P Commodity index Geometric series) was at 1360 at the end of their study (Dec. 04). It was at 822 three years earlier, those last three years increased returns by 70%.
[ QUOTE ]
Here's another article that tries to explain the concept.
How Worldly Is Your Portfolio?
"Quite simply, by dividing your money between just two types of investments, you take on more risk than you would by spreading it over a variety of assets that rise and
fall at different times"
[/ QUOTE ]
Emphasizing "fall" is appropriate for commodities, because historically, that's what they've mostly done. From Dec. 1979 to Dec. 1999 the index went from 1778 to 904. Ouch, losing half your money while inflation takes another half. Unlike stock indexes, which understate actual returns because they don't include dividends, the commodities indexes are raw charts of pain over many periods. From 1970 to now, even in this huge bubble we are going through, the SPCI-G has gone from 625 to 1514. That's not remotely keeping up with inflation.
If you look at S&P's price histories, you'll indeed see that futures tracking indexes do much better than the raw commodities indexes as the study claimed. But it's not magic. It's because the futures indexes include include cash interest earned in the required margin accounts. When you have a depreciating investment, even margin interest is going to have a substantial positive affect on returns over time.
Raw commodities are clearly uncorrelated with stocks. But their horrible long term returns don't make that much of a value. Commodities futures have a much better track record, on par with stocks the last 40 years, but I still have some skepticism due to the recent bubble and some possible data influences. In the case of the SPCI the indexes are new, and the data was recreated from historical records. Indexes are created to be sold, and when presented with a thorny issue the creators are biased to choose the answer that makes historical returns as high as possible.