Managing Editor

Hard Assets Investing: An Interview With Brad Zigler

Taking the absolute route to complex matters such as commodity pricing is, I think, dangerous. The tendency to mean reversion didn't evaporate overnight.

Technological improvements, too, have to be factored in.

Don't get me wrong: I'm not saying that there isn't scarcity. Some of what we see, however, isn't population-related.

From a trading and investment standpoint, there are very few straight lines.

Hard Assets Investing: An Interview With Brad Zigler

Thanks for the feedback.

With respect to the cyclicality of commodity prices, mlasky, let's not forget the statistical tendency towards mean reversion. Yes, populations are growing, but growth RATES can vary significantly. Look at UN Population Division projections for China, as an example, to see an arc leading to stabilization, then decline. Couple that with infrastructure improvements -- woefully ignored during the past two decades of disinflation -- that increase supply and you have the ingredients for price mitigation. Prices may stabilize at higher levels, but GROWTH in prices is like to moderate, meaning those investors who jump on the commodities bandwagon later see less upside potential realized.

As for the "beginner's" allotment to commodities, User, five percent of total assets in a broad-based commodity index-based investments, such as exchange-traded products GSP, GSG, DBC and RJI, are comfortable starting points for most financial advisors and their clients. Shading the allotment upward is a matter of taste and familiarity with portfolio theory.

You're right, Eric, about Swensen's aversion of a commodities allocation in his model. I'm inclined to think he did so because he advocated the use of Vanguard index (or index-like) mutual funds as exemplars of his strategy. Vanguard's low cost (expense ratio wise) and accessibility through dollar cost averaging (systematic investment of fixed dollar amounts over time), together with its ownership structure, were answers to the protestations he leveled against most other mutual funds in "Unconventional Success." You can find a working example of the Swensen portfolio in my Registered Rep. article, "Illiquidity Is Beautiful For Some," registeredrep.com/inve...). There were simply no Vanguard commodity index mutual funds extant when Swensen wrote his manuscript.
Of course, a well-diversified portfolio of ETFs/ETNs -- including an allocation to commodities, as outlined above -- can be used in lieu of mutual funds, but the dollar-cost averaging issue must be addressed for those still in the portfolio-building stage. An account with Zecco.com, though, can be used by retail investors to get commission-free ETF/ETN trades, facilitating the process.