Is it Time to Add Commodities to Your Portfolio?
A good investment portfolio has a mixture of stocks and bonds. How about adding commodities to your portfolio? Commodity prices currently are down. Is now a good time to buy commodities?
According to an article in the Wall Street Journal by Brett Arends,
Studies have found that over a period of a decade or more, adding a basket of commodities to an investment portfolio can reduce volatility and provide strong protection against inflation.
Mr. Arends further writes that the Dow Jones-UBS Commodity index is down 10% in the past seven months and down 22% over the past two years. This can be can be contributed to less demand and growth especially from China.
Commodities do best under inflation. In my last blog, The Quantitative Theory of Money, I wrote that inflation is part of the money equation. The easy money policy of the Fed eventually will lead to inflation according to the equation. With this in mind, buying commodities might be a good hedge against anticipated inflation. Especially now with commodities experiencing price weakness.
I recommend that one only invests up to 15% of their total portfolio in commodities. If your current portfolio mix is 80% stocks and 20% bonds, then it may be alright now to add say 5% commodities, leaving 75% in stocks and 20% in bonds. As I have mentioned in my blogs before, ETFs are a good way to invest. They offer diversification. Mr. Arends lists a couple of ETFs to look at. The are the Powershares DB Commodity Index Tracking Fund which charges annual expenses of 0.93% and the GreenHaven Continuous Commodity Fund with 1.05% in annual fees.
So take a look at commodities. Prices are down right now, and if you think like I do that inflation is going to increase, it might be wise to invest a small percentage of your portfolio in a commodity ETF.
Please let me know what you think about commodities by commenting below.
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