An investment adage that I like to share comes from financial author Larry Swedroe: “As an investor, having discipline means not confusing strategy with outcome.”
In other words, just because a plan doesn’t always play out as expected doesn’t mean you’ve made a mistake or that you should alter an otherwise well-designed plan. This is especially so if you’re considering only recent events. Sometimes, as my six-year-old daughter has observed, “That’s just life.”
Recently, Larry’s words of wisdom have applied well to a diversified portfolio that includes a modest asseet allocation to commodities. But before we turn to these financial matters, I’d like to share a personal anecdote to illustrate the difference between sound strategy and “just life” outcomes.
My Broken Boot Debacle
On my birthday this January, we took the kids skiing at nearby Mt. Brighton. We were all having lots of fun until one of my aging ski boots split wide open. It wasn’t even on the slopes, but while I was escorting my son to the bathroom.
After 15+ years, that boot had seen enough.
Had I known about the impending demise, would I have gone bowling instead? Once my boot broke, did we call it quits? No, and no. Boot and all, it still turned out to be a wonderful day.
Fortunately, I was able to rent replacements for $10 and ski on. Even had I needed to sit on the sidelines, the outcome was no reflection on what a fine idea it was to begin with.
In fact, we just may make it an annual tradition (with new boots).
Commodities and Current Events
Now, back to that commodities allocation I mentioned above. Similar to my ski boots’ lengthy service record across many peaks and valleys in my life, a modest asset allocation to commodities has served many investors well over the long haul, at least when the role that commodities are expected to play has been appropriate for an investor’s particular goals and risk tolerances.
As Larry Swedroe describes in one of his ETF.com posts:
“There are two main reasons for including commodities in a portfolio. The first is to hedge the risks of unexpected inflation, because commodities tend to perform well when inflation is rising and/or is greater than expected. … The second is to protect against the risks of a negative supply shock, such as a disruption in the supply of oil due to war or an embargo.”
In other words, when inflation is, or is expected to be on the rise, or a commodity is in short supply, an allocation to commodities can smooth out a stock portfolio’s negative returns.
On the flip side, when inflation seems under control and/or commodity supplies are plentiful, a commodities asset allocation may underperform. This has been the case recently, amidst stunningly abundant oil supplies and lowered expectations for impending rapid inflation.
Larry compares commodities to an “insurance policy” that pays off when times are rough, but may cost you some when all is well. “Commodities are considered in a portfolio not to enhance returns, but to dampen volatility and cut ‘left tail risk.’”
Do your circumstances warrant an allocation to commodities? Whether the answer is “yes” or “no” for you and your portfolio, the point is to decide based on whether they are a sensible planning resource for you and invest accordingly – not for a year or two of under- or over-performance during which you confuse outcome with strategy, but for the long haul of your investment journey. Having an advisor who is familiar with balancing the considerations involved can help too!