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Fool Me Twice?

Fool Me Twice?

April 11, 2017

The year was 2003, we had just experienced the worst stock market decline since the 1970s, and investors were clamoring for anything besides US large cap stocks (which had been hit hardest from 2000-2002).  Of course, small-cap stocks, foreign stocks, and bonds were logical and proven compliments for creating a diversified portfolio.  But for some, including financial advisors, traditional stocks and bonds weren't enough.  You needed exposure to "hard assets" such as commodities, we were told.  Investment firms scurried to meet this demand with commodity futures mutual funds and exchange-traded funds (ETFs).  Commodities, the research predicted, had returns similar to stocks and provided meaningful diversification to both stocks and traditional bonds.  Sound too good to be true?

The chart above shows the long-term returns on the Bloomberg Commodity Index since its inception in 1991.  Through 2016, commodities returned +2.4% per year, just 0.1% annually better than inflation (CPI) and 1.8% per year worse than low-risk short-term bonds.  Compared to stocks? 9.2% per year less.  This includes an annualized return of -5.6% per year for the decade ending 2016 (the period when most people were invested in commodities).  Best of all, to generate that paltry return, commodities investors had to accept stock-like volatility.  The promise of stock-like returns with added portfolio diversification resulted in almost no returns with unnecessarily high risk.  And in 2008 when stocks dropped, commodities followed them straight down.  In the event that the return/risk chart above doesn't demonstrate how bad commodities have been, glance at this Growth of $1 chart:

We don't hear any more about commodities today, investors and advisors have moved on to other alternatives -- long/short "multi-factor" funds and "alternative lending" and "reinsurance" strategies.  The allure, much like what we used to hear about commodities, is the opportunity for equity-like returns and less portfolio risk.  Should you go there?  Fool me once, shame on you.  Fool me twice, shame on me.


Past performance is not a guarantee of future results. Index performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and is not an offer, solicitation, recommendation or endorsement of any particular security, products, or services.