Commodities: Diversification and hedge

[freedom2022]

There were posts about commodities a while back, mostly about diversifications.
With current situation, it is a different ball game.
I own Power Shares DB Commodity Index Tracking, DBC, for a while as a hedge against inflation.
It went side way for a while. Now, it is rising up very fast.

Anybody invest in any commodities etf?

[big-papa]

Quote:

Originally Posted by freedom2022 There were posts about commodities a while back, mostly about diversifications. With current situation, it is a different ball game. I own Power Shares DB Commodity Index Tracking, DBC, for a while as a hedge against inflation. It went side way for a while. Now, it is rising up very fast. Anybody invest in any commodities etf?

No. I've looked at commodity future ETF's and MF's in the past but their volatility has been so incredibly high that I could never make them make sense as an addition to my portfolio, unless I had some foolproof way to market time it, which I don't.

Source: Simba's backtesting spreadsheet:
https://www.bogleheads.org/wiki/Simb...ng_spreadsheet

They did well during the early 70's when inflation was high and the 73/74 bear market, but pretty poorly in 75/76 when stocks recovered for a couple of years.

And when they go south, they can sometimes really go south.
1998 down -36% when Total Stock was up 23%
2001 down -32% when Total Stock was down -11%
2008 down -47% when Total Stock was down -37%
2014 down -35% when stocks were up 13%
2015 down -34% when stocks at about 0%

Because of this I've opted not to chase commodity futures. If I did decide to take such a chance it would be in a pretty small dose at which point it likely wouldn't end up doing much for my portfolio anyway.. The Ray Dalio All-Seasons portfolio is one such example with 7.5% each to commodity futures and Gold.
https://portfoliocharts.com/portfoli...ons-portfolio/

Again, a low dosage, if any, is supported by some of the data available in the Simba spreadsheet.
Total Stock Market and Commodity futures have had almost 0 correlation in the long run (Analyze Series Tab), which makes it a potential diversifier.
However, from 1970-2021:
TSM (total US Stock) has had a CAGR of 11.12% with a standard deviation of 17.21%
Commodity Futures has had a CAGR of 5.75% with a standard deviation of 24.87%

Correlation of commodity futures to inflation over this time period was about 0.44

So lower long term returns with higher volatility don't bode well for its inclusion in a buy-and-hold type of portfolio, in my opinion.



Cheers
Big-Papa

[Winemaker]

I had owned DBC for years and sold as my position went positive late last year. I have owned gold, silver, copper miners, natty gas drillers and producers, oil drillers and producers for years as well, and had better results. I should have bought/kept some more ADM, but felt it was dead money.

[CincyDave]

I had some cash in my HSA and bought some DJP about 6 weeks ago. Up about 21% so far. One of the few bright spots in my portfolio recently.

[Stormy Kromer]

My only experience with commodities was during my youth growing up on a farm. I'd watch the grain, livestock and energy markets daily and tried to participate once. I got out after one trade and a lot of lost sleep. Too wild a ride for me. I saw more than a few people get in trouble speculating in the commodity market. I don't doubt its possible to invest profitably in commodities long term, but I don't have the fortitude or knowledge. Even if I did, it would be such a small percentage of my portfolio it would have little impact.

Commodity investing reminds me of the last scene in Trading Places when Duke & Duke lost it all on frozen orange juice futures.