Commodity investing might not be the panacea

Buz Livingston
Buz Livingston

A wise man once noted politics makes strange bedfellows, Financial planning and investment advice (two different things) can as well. Imagine, it’s easy if you try, a Duke University professor and Charlie Mars singing the same tune regarding commodity investing. “Nobody wants to hear the truth. They just want to see a show.”

Duke finance professor Campbell Harvey often criticizes data firms use to support selling their products. Harvey claims over half of all research is “likely false.” Harvey also stresses you can dig into data to prove almost any point. Torture statistics long enough and they will confess to anything. Harvey warns that the hullabaloo bubbling about commodity investing will turn out to be a mirage, not a panacea. Remember prices for oil and metals crashed twice during first decade of the 21st century.

Adding commodities to an investment portfolio provides an asset class not correlated with stocks and bonds or in layman’s terms move independently. Negative correlation can be a good thing, but gold, the most popular commodity investment, has a negative return over the last 40 years when adjusted for inflation. People often tout real estate as non-correlated, too. While selling property can be quite profitable, owning it, maybe is a different critter. On the way to work this morning, I gazed upon at least one lot still roughly 50 percent under its peak, and that is after a seven-year plus bull market for stocks.

Large endowment, pension funds, and insurance companies have the resources and time frame to own esoteric investments and hold them for decades, but investors do not. Instead, to get commodity exposure advisors recommend mutual funds that track commodity indexes. However, commodity mutual funds primarily own U.S Treasury notes and bonds along with commodity futures contracts. All investors, regardless of how much money they have, would be better served avoiding commodity futures, Harvey argues.

Interestingly American International Group (AIG) developed a commodity index, Dow Jones-AIG Commodity Index. AIG then used research by two Yale professors, later debunked by Mr. Harvey, to sell products tied to their index. Commodity prices and commodity futures prices do not always move in simpatico. Timber prices depend on how close the mill is; others like tin and butter trade infrequently. Grain prices track futures, but grain-deficient areas often see price spikes unrelated to futures prices. Since I graduated from college gold has had a negative return, but next time will be different, lol.

Adding commodities is a siren’s song for investors. You get an illusion of superior investment technique. The truth no one wants to hear is there are no magic financial products, and spending less money could solve most personal financial woes, but folks would rather see the show. Buy Charlie Mars’ new CD, one song is about South Walton.

You can’t always get what you want, but Buz Livingston, CFP can help figure out what you need. For specific recommendations, visit livingstonfinancial.net or come by the office in Redfish Village, 2050 Scenic 30A, M-1 Suite 230.