Commodities

[cute fuzzy bunny]

Quote:

Originally Posted by cjking Then I read a convincing paper that showed you could expect to make 4.3% "diversification" returns and 1% "roll returns". Diversification returns are the profits you make from the buying low and selling high that is implicit in regular rebalancing of a portfolio with highly volatile components. "Roll returns" are the returns from providing insurance.

Wait until you read the convincing papers that say that rebalancing hurts your long term returns, rather than helping.

Quote:

Even better, this is the only asset class with negative correlation to everything else we might invest in, so it makes sense to have some even if the expected return is quite low.

Hmm, gold and oil along with most other commodities went up right along with the stock market and real estate, and then all of them went right back down again almost in lockstep. They all also rose while inflation was low and then all dropped in tandem with the dollars improved strength.

So I think I'll need to be counted among the folks who think that this negative correlation happened when only pros invested in commodities and stopped when they were packaged into ETF's and all the financial advisors told their customers to buy 3-10% of their portfolio value in them.

Heck, an 'absolute return' fund that a few posters were very excited about due to its negative correlation and 'safety nearly to the level of a cd' is down 6% over the last 3 months, >4% this month and thats the worst 3 month loss in its history. Falling right along with stocks, bonds and real estate.

Hmmm...is anything working right now? I seem to remember that even in the horror show 2002 market, at least real estate, bonds and a few other things were still working...

[mathjak107]

commodities are another asset class to add to the mix. why they go up or down is irrelevent, when they go up be happy just like you would in any other asset class you diversify in. when they go down buy more and rebalance... just look at it like you do your stocks. the s&p returned less than treasuries over the last decade, commodities sored, does that mean you dont buy stocks anymore? of course not. the main thing is its just another level of diversification and stop trying to prove why it works or not

[cute fuzzy bunny]

Really? So its a good idea to own investments where the investor has no idea why they go up or down or why it works or not?

Fascinating concept.

Unfortunately I cant look at it like I look at stocks. I know why they go up and down and how they work.

[mathjak107]

well you should have a clue about any investment but trying to out guess where they are headed or whats going to drive them up or down next is a fools game. just cover the basic bases and let it ride.

if somethings not headed down when other stuff is going up then your not diversified enough or trying to market time

[cute fuzzy bunny]

Would you consider commodities a "basic base"?

[mathjak107]

absolutely in this day and age. 20 years ago nope, maybe even a decade ago nope but today as basic as bonds ,reits and stocks

[LOL!]

http://www.indexuniverse.com/provide...opic.php?t=322 is a spirited discussion of commodities and whether you need to own them or not. It may be helpful reading to the OP.

Specific advice to the parents: Sell the fund and go back to total market index investing. The total market would hold the stocks that were in their natural resources fund anyways. Also by investing the stocks of companies, they are not investing in commodities per se and probably do not acrue any benefit. That is, they are simply performance chasing: buying high and selling low. They need to read "Why Smart People Make Big Money Mistakes".

[mathjak107]

never confuse owning the commodities with owning the stocks. oil stocks were sucking wind as oil broke new highs... stocks are still companies first and plays on what ever they hold 2nd , maybe. they are subject to political issues, strikes, bad managment,missed earnings etc....

my feeling is if you want commodities coverage in your portfolio buy commodities and leave the stocks to the stock portion

[cute fuzzy bunny]

Quote:

Originally Posted by mathjak107 absolutely in this day and age. 20 years ago nope, maybe even a decade ago nope but today as basic as bonds ,reits and stocks

Because...?

[mathjak107]

because they aint stocks and may react differently under certain conditions at times. in a market where good news can equal bad news except when good news can equal good news and bad news can equal bad news its very difficult to call what reaction to the various asset classes any asset will have. in a world where commodities, oil and long term treasuries turned out to be bed fellows strange things can happen at anytime.

i like the extra layer of diversification , you may not care to have it. its just another strategy

[cute fuzzy bunny]

Nope, I love diversification. I just want to understand if and how it diversifies.

Commodities over the last 5 years went pretty much north no matter what anything else did. Now they're going down with everything else.

Thats not a diversifier.

I once again caution people to understand their investments before landing a lot of money in them. And be quite wary of people who promote investments who cant explain why they're beneficial.

[mathjak107]

ooooh yes it is.. you said it yourself. they went up when everything else went down..... the markets been coming back slightly , the dollars been up, they are now moving the other way. if thats not diversification then i dont know what is. commodities are just another asset class that moves to its own beat sometimes moving in the same direction as equities and bonds and sometimes the opposite. no different then sometimes equities and bonds move the same way at times. . the real deal is if the perception of inflation should reach the hyper stage. then all traditional thinking about commodities should hold true. . listen the point is you are always down on commodities and are always looking for someone to tell you why and when its explained to you you still come back and go but why?

if you dont get the point by now there is no point in still trying to explain it. you can say why? about any asset class including equities which did almost nothing for more then a decade. every asset class is supposed to respond to one of the 4 possible economic scenerios that are possible,

inflation,deflation,prosperity,recession are the 4 outcomes. equities only cover part of that. exactly when and how each class reacts can be skewed at times and can have strange results to what they shouldnt . true diversification covers those 4 possibilities. you can choose to cover all,some or none of the scenerios but thats an individual choice

[cjking]

I'm with the rabbit on this one. Having taken the trouble to understand commodities I do not intend to touch them.

(See my original post in this thread for full details.)

Having followed commodity threads in more than one forum, I know that some investors think that just because the asset class is a diversifier, it's OK to invest in it, without knowing that it has a significantly positive expected return.

Does such an investor bet a proportion of his assets on the spin of a wheel at the casino on a regular basis? That's an "investment" with returns uncorrelated to the rest of his portfolio, a volatility that can be made similar to that of commodities, and (as far as he knows) the expected return is no different from commodities.

Perhaps he should forget about traditional positive-return asset classes altogether, and "invest" in a diversified portfolio of gambling opportunities. There's no limit on the different "asset classes" you can find, once you abandon the need for a positive expected return. You could put equal amounts of money into 20 different "investments" all with zero correlation to each other.

I'd prefer to own shares in the casinos and the bookies. My portfolio would be far less diversified, but I reckon I'd end up with more money.

[mathjak107]

we like to think our investments have postive returns on the horizons but we dont know that. gambling dosnt respond to any of the 4 economic scenerios as far as its outcome. perhaps if it did it could be an asset class ha ha ... if we turned to the perception of hyper inflation from all this spending watch what happens to commodity prices and watch what happens to the more traditional stocks and bonds mix as they really may get hit hard......

the idea of diversification is not to predict what goes up next or falls next but to profit from any economic scenerio to offet losses somewhere else.

since anything really really bad happening in one situation may drop its corresponding asset class around 50% historically the other opposite should double triple etc...... we hope

[cjking]

The point is, when we lend money we expect to get profit from interest, if the borrower doesn't go broke, when we own property, we expect to get rent, if the building doesn't burn down, when we own shares, we expect to get profits, if the business is successful, but when we buy a commodity index tracker, there is no known expected economic return, just luck, good or bad.

More concisely, there is no fundamental economic reason to expect, with average luck, positive returns from commodities. There is for everything else.

(I'm oversimplifying hugely here. Some people will argue, with some justification, that there is an expected positive return from rebalancing, however the unknown and possibly hugely negative roll returns have to be set against that.)

[mathjak107]

well you got a choice, you can do nothing and just keep absorbing the hit from rising oil and food prices and take it out of your pocket or you can profit too each time they rise again. just wait until the first hint of recovery appears world wide and oils 175-200. i think we stand a pretty good chance of having higher highs and higher lows in commodities again very soon, in fact probley sooner than the equity markets recover. . the past few years my gsg commodities fund has given me enough of a profit to cover my extra energy,food and fuel costs for the next few years. if thats not reason enough to add them to your mix then theres no point discussing this...... we dont need the recovery to actually start to send them soaring again just the perception.. 5% moves in one day are normal.... if you think your only going to get in before the big turn around good luck to ya.

[cute fuzzy bunny]

If you're going to establish an argument that owing oil is a good idea, I cant disagree with that. However oil doesnt fit with your 'diversification against economic conditions' argument. Oil keeps going up steadily due to increased demand and supply not keeping up, with some hiccups along the way for sudden demand increases, sudden supply decreases, and geopolitical events. Although it may be worth pointing out that for most of its history, oil prices adjusted for inflation werent a positive return.

The rest of the commodity bucket doesnt seem to pass the tests for decoupling from economic events or even moderate predictability of decoupling from other asset classes. Adjusted for inflation most of them arent producing a positive return either.

And no dividends or interest to make up for it.

If the argument for those is "Well, sometimes they did, there arent any good answers, so throw some money into them and hope for the best!"...well...I think I'll pass.

If you want a neutral return, you can buy cd's and get that with no risk. If you'd like a foolproof slightly positive return against inflation, buy TIPS.

[mathjak107]

most of the commodities funds like gsg and dbc are very heavily weighted in oil and gas.... where goes oil goes the funds. where goes oil goes food prices as delivery and farmland is grabbed for ethanol. where goes the recovery goes oil, steel and industrial metals..... it all boils down to one thing, we are going to see another big rise across the board as soon as things look up again.


just watch where prices head if we have the perception of hyper inflation or severe inflation. non the less it all boils down to whether you want the protection or not in your portfolio. i do and havent regreted it for a second. even now ...

[mathjak107]

cd's are a guaranteed loss after taxes and inflation, tips are no better as they barely kept pace with the rise in commodity prices..... the index tips used is manipulated and tips themselves can loose value in inflation as new tips offer higher rates then older tips if you want to sell or own a tips fund

sorry but cd's and tips are no match for commodities when prices are rising sharply

gsg 1yr return 47.88%
tip return 6.00%


as far as the 4 economic conditions we are mid-stream inbetween heading for recession or severe inflation depending which way the wind blows.. once we have a clear trend commodities will either be higher or much lower and bomnds will take over but yes commodities are directly linked to the 4 economic conditions

[cute fuzzy bunny]

Yahbut, except for a couple of spikes (followed by drops) commodities ex-oil havent even kept up with inflation.

If the argument is that they'll spike unexpectedly and during those times you grab some money out of them and put it into other assets, then we're sliding rapidly back to the casino analogy. We're a bit away from the 'diversifier' and 'reflexive to certain economic conditions' arguments.