Is There a Role for Commodities in Long-Term Wealth Accumulation?

Abstract

The first three years of the 21st century brought one of the worst bear markets in U.S. history, with equity markets around the world falling around 40% in real terms. This was followed in 2008 and 2009 by a global slump in economic activity and stock market price declines not seen since the great depression. The poor performance of traditional asset classes and concern over their future prospects have raised interest in the inclusion of alternative assets as strategic sources of long-term wealth creation. In sharp contrast to the recommendations of modern portfolio theory, a vast majority of high-net-worth investors are not well diversified. The article outlines the role of commodities in long-term wealth maximization. It demonstrates an alternative approach to measuring risk and diversification by addressing the question: How much can I realistically expect to gain by strategically investing in commodities over my working life? The method is easy to understand and can be easily implemented. Even individual investors with small portfolios can use the approach to gauge their own diversification benefits and risk exposure.

TOPICS: Commodities, portfolio theory, portfolio construction, performance measurement