Put some money in commodities?

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Gaston
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Joined: Wed Aug 21, 2013 7:12 pm

Put some money in commodities?

Post by Gaston »

Yes, I know we Bogleheads shouldn’t try to time the market, and we shouldn’t jump from one fund to the next. But I’ll admit I’m a bit worried about potential inflation, and the havoc it might wreak on stocks and bonds (particularly bonds).

One investment that often does well in times of rising inflation is commodities. So I’ve been thinking about shifting 5% of my portfolio into the Vanguard Materials ETF (VAW). ER = 0.10%. I would do this within an IRA, so no tax consequences.

Am I tinkering too much?
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nedsaid
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Re: Put some money in commodities?

Post by nedsaid »

Actually not a bad idea. Better in my view to own stocks that produce commodities than the commodities themselves. 12% of the ETF is in Linde PLC, not sure what that company is or what it does. Just looked it up, Linde PLC produces industrial gasses. The ETF is almost Mid-Cap and almost Value. Good to see you using your noggin on this one.

Not sure if I would recommend what you are thinking about.
A fool and his money are good for business.
brad.clarkston
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Re: Put some money in commodities?

Post by brad.clarkston »

5% isn't going to swing your port one way or the other so it's not the worst idea I've seen today.
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retired@50
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Re: Put some money in commodities?

Post by retired@50 »

I'd ignore this desire.
The fund has shot up 80% in the past year.
You'd be buying high, which would likely create very low future expected returns.

Regards,
This is one person's opinion. Nothing more.
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nedsaid
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Re: Put some money in commodities?

Post by nedsaid »

retired@50 wrote: Sat Jun 19, 2021 11:52 pm I'd ignore this desire.
The fund has shot up 80% in the past year.
You'd be buying high, which would likely create very low future expected returns.

Regards,
Yes, I tend to agree with your advice. As an investor, you want to be proactive and not reactive. We had an inflation report of year over year inflation of 4% in April and 5% in May. So everyone and his brother now believe that inflation might be a problem and they are looking for things to counter the potential threat. The risk you run is that this inflation trend might be transitory and you would be buying this just as inflation was abating again. You might just get whipsawed here.
A fool and his money are good for business.
Wedemeyer
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Re: Put some money in commodities?

Post by Wedemeyer »

I'd prefer to buy an asset after it went down 50%, not up 50%.
jimkinny
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Re: Put some money in commodities?

Post by jimkinny »

A 5% allocation to anything is pretty much meaningless in terms of a portfolio's overall performance.

If inflation is the issue you are concerned about buy TIPS and/or I bonds.

Wages, stocks and and maybe housing have historically, over the long term, kept up with inflation.
Always passive
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Re: Put some money in commodities?

Post by Always passive »

retired@50 wrote: Sat Jun 19, 2021 11:52 pm I'd ignore this desire.
The fund has shot up 80% in the past year.
You'd be buying high, which would likely create very low future expected returns.

Regards,
In addition, since 2014, when this fund was started, its correlation to the equity market is 0.89, meaning that you will not get any diversification advantages.
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nisiprius
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Re: Put some money in commodities?

Post by nisiprius »

Gaston wrote: Sat Jun 19, 2021 9:36 pm Yes, I know we Bogleheads shouldn’t try to time the market, and we shouldn’t jump from one fund to the next. But I’ll admit I’m a bit worried about potential inflation, and the havoc it might wreak on stocks and bonds (particularly bonds).

One investment that often does well in times of rising inflation is commodities. So I’ve been thinking about shifting 5% of my portfolio into the Vanguard Materials ETF (VAW). ER = 0.10%. I would do this within an IRA, so no tax consequences.

Am I tinkering too much?
First, I would caution very strongly against accepting "sound-bite wisdom" like "One investment that often does well in times of rising inflation is commodities" without carefully investigating this for yourself.

To begin with, do you mean
  • Commodities themselves--physical things that must be shipped and stored
  • Commodity futures
  • The stocks of companies whose business revolves around commodities?
The Vanguard Materials ETF isn't commodities and isn't commodity futures, it's stocks of companies whose business revolves around commodities. That is a very very loose linkage.

Second, I only know of two investments for which we can predict future performance in a period of high inflation: TIPS and I bonds. Since they are literally indexed to the CPI, we know exactly how they will do in periods of high inflation. I bonds will track inflation over any time period of 1 to 30 years, earning a small amount above that, known when the I bond is bought.. An individual TIPS bond will track inflation if bought at issue and held to maturity, earning a small amount above that, known when the TIPS is bought.

Third, for anything else that is claimed to do well in times of inflation, I would ignore the claims unless you can find actual data that includes more than one period of high inflation. That means an investment that has existed, and for which you can find data, going back to at least 1940.

Fourth, it's not helpful if something does well in inflation if it does poorly when there is little inflation, because you really don't know what is ahead. Really. I mean it. For obvious reasons--suddenly it's a year since a low point so the particular annual inflation number just popped--everyone is suddenly starting to worry about inflation. One of the things I've learned is that even when "everyone" seems certain something will happen, it often doesn't. For eleven years, Larry Swedroe made a list at the start of the year of the "sure things" that seemingly everyone agreed were going to happen, and then kept score. The final total was that roughly a third of them happened, roughly a third clearly did not happen, and roughly a third were too hard to call.

Fifth, it's not enough for something to do well in inflation, you need to consider how it stacks up against alternatives. The fact is that almost everything does tend to track inflation over intermediate-to-long periods of time. The things that don't are the exceptions: physical currency, non-interest-bearing checking accounts, and nominal bonds. Everything else more or less tracks inflation and thus everything else can and has been touted as an "inflation hedge."

So, how about "commodities?" When they first became a topic of great interest in the forum--and were touted as a recommended part of retirement portfolios--it was around 2005 or so, and the vehicle that was most commonly suggested was the PIMCO Commodity RealReturn Strategy Fund, PCRIX.

Why are you considering VAW and not PCRIX? Probably because people don't talk a lot about PCRIX any more. Why don't they? Probably because of this:

Source

Image

"Commodities" were highly recommended up to 2008. In 2008-2009 they blew the "low correlation with stocks" promise. And since then, they've pretty much blown the "equity-like returns" promise.

But I assure you, if you'd asked questions about investing in "commodities" before 2008, you would have heard about and likely considered PCRIX. Which has, in fact, outperformed the Bloomberg Commodities index.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Topic Author
Gaston
Posts: 198
Joined: Wed Aug 21, 2013 7:12 pm

Re: Put some money in commodities?

Post by Gaston »

Thank you all. You convinced me not to tinker.
investuntilimrich
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Re: Put some money in commodities?

Post by investuntilimrich »

Way late to that party, I would not go in now too much risk for too little upside left. I think you made the right call.
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