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    What do you think of investing in a commodities fund? Should this be part of the portfolio?

  • #2




    What do you think of investing in a commodities fund? Should this be part of the portfolio?
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    Not in my book.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      No. Definitely not. Look at a long term chart, commodities basically if you're lucky will be par with inflation and your "real, real return: (after taxes, inflation, etc) is likely to be negative. They are neither positively or negatively correlated to any predictable degree and thus dont serve a diversification purpose well either. Its only been recently that these have been pushed as an alternative investment asset for diversification, but theyve not done a very good job of it.

      If you want exposure to commodities you can buy emerging market funds, preferably in times like now where commodities are getting crushed.

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      • #4
        Another vote against commodities.

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        • #5
          Hmmm... Not so fast.

          That depends what you are defining as a commodities fund. if you are talking about blindly picking an ETF such as DBC, or DBA I would say do your homework. Are you market timing because they have been hammered? Careful.

          However, managed futures are a bit different. These typically are trend following, with very low correlations to the broad market. Thus, providing diversification by source of return, a different take on  the traditional diversification methodology. There are some very good firms out there with lots of data and 30 yr track records, ie) Dunn.  However, as good as the non correlation is and as tempting as the double digit annualized returns are there are some negatives. In particular, commodities are a strange entity when it comes to trend following/momentum and can incur large max drawdowns. I have been involved and did very well, but on deeper analysis and moving closer to retirement I decide to not incur the volatility risk and sold out from Dunn., albeit with a nice profit. For me, I liked the non correlation to the equity and bond market, but the max drawdown risk scared me off eventually.

          Get in touch if you wish to discuss further.

           

           

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          • #6




            Hmmm… Not so fast.

            That depends what you are defining as a commodities fund. if you are talking about blindly picking an ETF such as DBC, or DBA I would say do your homework. Are you market timing because they have been hammered? Careful.

            However, managed futures are a bit different. These typically are trend following, with very low correlations to the broad market. Thus, providing diversification by source of return, a different take on  the traditional diversification methodology. There are some very good firms out there with lots of data and 30 yr track records, ie) Dunn.  However, as good as the non correlation is and as tempting as the double digit annualized returns are there are some negatives. In particular, commodities are a strange entity when it comes to trend following/momentum and can incur large max drawdowns. I have been involved and did very well, but on deeper analysis and moving closer to retirement I decide to not incur the volatility risk and sold out from Dunn., albeit with a nice profit. For me, I liked the non correlation to the equity and bond market, but the max drawdown risk scared me off eventually.

            Get in touch if you wish to discuss further.

             

             
            Click to expand...


            Managed futures are certainly different, and have been doing great amongst the turmoil recently as well. Annoying part is you cant seem to just tack that on like an etf in your portfolio, you have to find specific firms. I would have a small allocation to them if it were simpler, maybe in a few years I will.

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            • #7
              Larry Swedroe has some articles online about the benefit of having a small allocation to commodities due to low correlation with equities.  (just Google his name and 'commodities').

              Swedroe's position on this reminds me of Bernstein's writing on gold - he concluded there was a small benefit, *over a long time horizon*, to holding about 3% in gold, again due to low correlation with the remainder of your portfolio.  (I believe the last month has seen this play out to some extent.)

              I personally don't think there is much reason to go to much trouble to seek out commodities investments/funds.  They usually are not included in most retirement plans or 'commission-free funds' lists.  Plus expense ratios are usually pretty high.  But Bernstein convinced me to have a small gold allocation, which I currently hold in GLD.  I've thought about the Vanguard Precious Metals fund, but that fund is crazy volatile and doesn't seem to move in sync very well with gold since it has other investment objectives.

               

               

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              • #8
                Just an FYI - Dunn Capital Management has $100K minimums on initial investment. Good track record, but as above you have to be willing to accept high volatility.

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                • #9
                  Well, now Vanguard has gotten into this "game", with a very low ER of 0.2:

                   

                  https://investornews.vanguard/commodities-investing-vanguards-new-way-to-diversify/

                   

                  Thoughts?  Revisions -- I know WCI made comment against commodity investments in a podcast, and probably not suited for most retail investors, but if one has a net worth of 1$ million+, 50K is <5%, then maybe?

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                  • #10




                    Well, now Vanguard has gotten into this “game”, with a very low ER of 0.2:

                     

                    https://investornews.vanguard/commodities-investing-vanguards-new-way-to-diversify/

                     

                    Thoughts?  Revisions — I know WCI made comment against commodity investments in a podcast, and probably not suited for most retail investors, but if one has a net worth of 1$ million+, 50K is <5%, then maybe?
                    Click to expand...


                    interesting.

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                    • #11
                      Image result for trading places pork bellies

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                      • #12
                        Commodities are fine. I don't think they're an asset class well suited for conservative buy-and-hold types because those types generally don't like volatility, but like any asset class, they are just a tool. Ray Dalio recommended 7.5% of portfolio in commodities and 7.5% gold in his All-Weather allocation (geared towards DIY buy-and-holders, ie 90% of this forum ppl)... mainly to really grab gains in years of significant inflation. Inflation can and will outpace stocks and company profits in some years, but commodities are the antidote (esp gold).

                        Much like the stupid small cap index ETFs (probably silliest and most unnecessary - yet fairly popular - financial product in the fund market?), any funds with a group of volatile things defeats its whole purpose. Commodities are pretty volatile and cyclic relative to most other popular asset classes, and that is GOOD if you know what you're doing. Much like small cap stocks, I think individual commodities can be quite useful if you know what you are trying to get (more risk for home run gains, not unlike small and micro cap stocks)... but fund baskets of them defeat the whole purpose. To put them into fund baskets just adds fees and lowers volatility by making you take the good ones with the bad. You get the unproductive mining companies with the winners; you get the top farms with the ones that cut dividend or even bankrupt. That is bad for long term investors due to the high ER, and it is bad for shorter term buyers/traders due to diversification slowing gains.

                        With large cap or total market or bonds or even foreign markets indexes which will be bought and held, that fund diversity might be acceptable or preferred and able to be achieved for low ER... but not for volatile things. You simply create high ER (since the fund has to do a lot of transactions) and you neuter returns with funds on volatile stuff. I can't expect nearly the returns from a fund with total commodity (eg, DBC) or an ETF with two dozen gold mining stocks as I could from just GLD. The same would be true for buying one petro or ore mining or distribution company versus a fund for that sector or an ETF with the top 15 major gas station companies. You are adding 0.5% or even 1% ER when you buy a typical commodity fund, and you are cancelling out the biggest winners in the group by also having the underperformers. Pick the winner(s) as best you can, and save the ER. GL

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                        • #13




                          What do you think of investing in a commodities fund? Should this be part of the portfolio?
                          Click to expand...


                          nothing useful. no.

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