Tom Szabo

Commodities: On the Downhill Slope?

Some studies suggest an allocation of 1/3rd to stocks, 1/3rd to bonds and 1/3rd to gold will actually increase overall portfolio performance while reducing volatility. This is over the long term, which is what most investors who are looking to invest for retirement would care about. I know gold isn't the same as commodities but the point is that you need more than a mere 5% to make much of a difference in any allocation strategy.

Commodities: On the Downhill Slope?

I don't understand why moderate amounts, or only 5%, should be allocated to the commodity theme if you think they continue to be in a secular bull market. Just because they are volatile and can drop 50%? What about financials, home builders, high-tech, retail? What about a strategy of increasing exposure during a pullback and then reducing it during periods when commodities are soaring? What else is currently in a confirmed bull market? If allocating only 5% to commodities, that means 95% is being allocated potentially to sectors in a bear market! Yes, it's very possible there is still some ways to go until commodities reach a bottom--I for one wouldn't be surprised by oil trading under $100--but one could utilize put options to protect against the worst case scenario while still maintaining a reasonable exposure to the sector. But don't bother with a constant 5%, it ain't worth the effort unless you are talking about gold buried in your back yard.