Tom McManus was on CNBC earlier today and the discussion drfited to what would be an appropriate weight for commodities in a diversified portfolio.
I have written more times than I can count about my belief that commodities are a crucial element to being diversified. I have heard in various interviews that anywhere from 5-15% should be in commodities. I have never been a proponent of a double digit weighting.
Right now just about everyone has the gold ETF (GLD) at a 2-3% weight and some clients own a big, foreign, diversified miner at 2% and that is it for direct exposure. I do think of Plum Creek (PCL), which I have disclosed owning previously) as being different and PortfolioScience backs me up saying that its correlation to GLD is 0.057 and although I don't own it anywhere, PCL's correlation to the DB Commodity ETF is also quite low at 0.026.
Kind of in the commodity arena is the Australian bank I own for clients but its correlation to GLD is 0.359 and a few people own CVRD (RIO) and a Chilean bank which correlate to GLD at 0.429 and 0.187 respectively.
I don't view the above as particularly heavy but you may view it otherwise, I should add that no client has all of the above.
I find that there is a lot of extreme positioning and commentary available out there and while I find utility in reading the arguments made, I don't find much utility in the positioning.
All of the commodity naysayers will tell you that commodities are volatile and difficult to time well. Hello, they are right! The volatility (this is a euphemism for decline) of late is exactly what they mean. My first post on gold two years ago said that stocks tend to zig when gold zags. This summer captures it perfectly.
On more than one occasion, I have said here that I do not want gold to ever be the best performing thing I own because chances are things look rough elsewhere.
Another thing I have preached is that not everything should going up at the same time. If so, you are not that diversified. Lately gold and oil have declined but a lot of other things have been working. While it is true I have lagged this summer the fact is some things are up a lot, look at Walgreen and Target.
The action recounted in this post is the playing out of almost every theory I subscribe to. Despite getting a couple of big things wrong client accounts are going up. I still think it turns but even if I stay wrong the impact for clients is much less than had I been only 30% invested.
Good stuff!
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13 comments:
You show that PCL's correlation to GLD is very low. Just out of curiosity, how does PCL correlate to the S&P?
John in Albuquerque
portfolio science has it at 0.634
A good starting place would be the market weighting. For example, if commodities are 5% of the investable universe, the average investor has to be at 5%. If all investors shifted to 10% it would simply bid the price up artificially.
On the other hand, it is reasonable to assert that investors have had too little exposure to commodities historically, and that the weight may still be too low to reflect the fact that the investing world has to play catch-up.
What's the correlation between CAJ and GLD? The charts look quite comparable, meaning that GLD pricing is correlated to yen / dollar.
Roger I like your correlation data. I've never seen financial writers, similar to yourself, use this. Makes great sense, infact it seems the only way to make sense, if the guiding principle is diversification. You have something unique going. Now that I've sucked up, so to speak, (but only meant as authentic)how is the "average" equity portfolio doing ytd for the moderate growth client...or however you feel fair to slice it.
Perhaps the iShares Goldman Sachs Natural Resource Fund (IGE) might be considered as commodity diversification.I don't mind IGE's exposure to oil because the fund is a balanced natural resource stock - something my portfolio needs. I have held IGE for almost two years and see no reason to sell it. Insurance is insurance.This may be too simplistic for some, but it has worked well for me.
OT but relevant to cnbc. A money manager is interviewed. Why is the market going up? (paraphrasing)"Not a lot of time left in the year and performance is not very good" (which means, dem guys got together and decided to pump da retailer) So, what are you buying? "Err, Err...the commodities are looking better" RQ. "Well, the vix is at another low."(Which means, I'm ain't no fool, I'm not gonna get sucked into this rally and be left looking for the door.") Overblogged where half empty looms large...if you get my drift. Can the big boys really manipulate the market without a smoking gun?
Not sure why CAJ would be a proxy for Japan but either the number on portfolioscience is 0.372.
I have a generic portfolio on Yahoo finance that is a fair representation of what I own wieghted accoringly. I need to disclaim the hell out of this but YTD through today's close it is up 7.66%.
IGE has a 0.51 corrleation to GLD and 0.43 correlation to DBC.
To the comment times at 1:45, I'm sorry I don't follow at all.
forgot; the generic yahoo portfolio is the equity only component, most clients have some amount of fixed income exposure.
Hi Roger,
I new to the concept of investing in commodities as part of a diversified portfolio. I have several questions I hope you can answer:
1. What do you mean by commodities? For example, does the CRB index and it's commodity weighings jibe with what you consider commodities, or would you overweight with industrial materials?
2. I've always read that commodities are very poor investment vehicle over the long term. I just looked at some long term charts of various commodity indexes, and they seem to bare this out. And when you account for inflation...geez, commodities are big time losers over the long haul.
3. Just because some commodities will run counter to stocks or bonds, reducing overall portfolio volatility, does it really make sense to include commodities in your portfolio. I mean I could reduce the beta of my portfolio by including a few inverse stock funds, but that doesn't seem to make much sense either.
I enjoy reading your posts and hope you can shed some light for me. Thanks!
"However to make the case for commodity diversification after a substantial price move is a short term bet on the continuation of the current bull market. While commodities may be a legitimate asset class, we should never confuse brains with a bull market.
"
quote from: http://abnormalreturns.wordpress.com/2006/04/28/commodity-turnaround/
George, not sure if that is a shot at my comments, which is fair game, but I think I have been consistent saying that gold is something I beleive in as a long term hold, in moderation, for what I believe is true diversification.
But what about Pork bellies? Sugar? Cotton? Do these commodities really belong in an investment portfolio, even if you hold just a small fraction of each?
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