The Role of Commodities in your Portfolio - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 21 December 2013
The Role of Commodities in your Portfolio A  A  A

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
In recent months, commodity funds have suffered and experienced significant outflows. For individual investors holding commodities, their portfolios have dropped as commodity prices have fallen. This is particularly true for precious metal commodities like gold or silver. As the US Federal Reserve has begun its taper of quantitative easing, the reduced liquidity in markets is negatively impacting commodities.

It is important to keep in mind the role of commodities in a well-diversified portfolio. Many investors want to hold commodities, and would like to know how much to hold. But first, let's consider commodities historically as an asset class. If we look back over the last 50 years, commodities have performed much worse than stocks over this time.

In fact, the real return of commodities is close to zero over long periods. The return from commodities tends to cover inflation, but not much else. The main benefit from holding commodities is that they provide good hedges against inflation and they perform well during periods of crisis. Thus, the main role of commodities in a portfolio is to provide insurance when times are bad.

What this means is that we should be holding commodities as insurance, not for long term gain. When it comes to building long term wealth, commodities are unlikely to provide the same returns that stocks do. This is especially the case when we consider portfolio returns over long periods, i.e. 10 years or more.

Given this information, how much of our portfolio should we allocate towards commodities? We should allocate a relatively small amount, because in the long run we are not likely to earn large returns from commodities. But we want to hold enough so that we get the benefits of diversification when inflation is high or times are bad. A good number to hold is around 10-20% of one's portfolio.

An investor can also adjust their commodity holdings depending on their outlook. If the future economic outlook is negative, the investor can increase their commodity holdings, and vice versa when the economic outlook is positive. Regardless of one's approach, it is important to keep in mind the primary role of commodities in a portfolio. The purpose of commodities is to provide insurance, not to build long term wealth.

Editor's Note:
The Equitymaster Conference 2014 - Beyond Uncertainty, is just around the corner. And we are delighted to introduce you to our Roving Reporter... Akshaya Singh. Over the coming days, Akshaya will be your eyes and ears for everything that we work on related to the conference. So watch out for the updates. Here's his first post from the field...

Hi Dear Friend!

As was just told to you, my name is Akshaya Singh and I'll be your Roving Reporter for Equitymaster Conference- 2014.

In other words, I'll be your eyes and ears inside the Equitymaster office and I promise to keep you informed on all the behind-the-scenes action.

Starting today, I'll be writing to you on everything that's being planned to make Equitymaster Conference 2014 unlike anything you might've attended before!

I'll give you rare insights into the speakers' minds. A sneak-preview of the magnificent venue. A glimpse into how the Equitymaster Team is preparing for their sessions.

In fact, I'll handhold you all the way till the closing ceremony of the Conference.

However for today, it's just a quick hello and a reminder that Equitymaster Conference 2014 is scheduled to be held at the magnificent Taj Mahal Palace Hotel in Mumbai on 1st February, 2014.

So mark your calendars, reschedule your appointments and book your flights!

And, do keep an eye out for my next Insider Reporting with details on how you can get your pass for this conference.

If there's anything in particular you'd like me to cover in these articles... please send in your suggestions to

Best Regards,

Akshaya Singh
Roving Reporter
Equitymaster Conference 2014

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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