Practical Strategies in an Economic Decline
If you’re like many investors, your portfolio just isn’t getting the job done! The question is though, how do you get it to where you want to go without it taking on excessive risk that you can ill afford?
Since the dot com crash, commodity futures have hit the limelight as less of an alternative investment and more of a mainstream asset class. Should you change up what you are doing and further diversify or stick with what’s proven to work in the long haul? The surprising answer is both.
What does the research suggest?
In “The Tactical and Strategic Value of Commodity Futures” by Claude B. Erb of the Trust Company of the West and by Campbell R. Harvey of Duke University (January 12, 2006), Erb and Harvey dissect the sources of commodity futures returns and analyze investment strategies that might make appropriate use of commodity futures. Their conclusion is that commodity futures can and probably should play a role in a strategic investment plan but only when conducted by highly sophisticated traders. One work around for new investors is to get a professionally managed futures account by a professional trader. These managed futures can increase an investor’s profit and returns and most importantly diversify their accounts properly. A good listing of the top managed futures funds can be found at emanaged futures – click here. Erb and Harvey state in their conclusion that “the goal of this paper is to explore both the strategic and tactical opportunities that these assets present to investors.” (page 55) A key question is whether commodity futures tend to provide a “risk premium” for a long term passive buy-and-hold strategy, just as equities have exhibited.
Understanding what TRUE diversification means
One of the key benefits to these asset classes is their definitive correlation. During the stock market crash of 2008, many futures fund still profited. This is due to the fact that futures can profit in declining, growing, and even flat markets. Due to this, while many stock market investors lost incredible assets, many commodity futures actually greatly increased in value. Of course, in the opposite manor, stock market gains are also not correlated and futures trades can lose money even in appreciating markets.
When understanding diversification, it’s important to know that many asset classes are correlated and that means it’s not really diversified. It specifically means that even if they don’t profit or decline by the same amount, if your asset classes rise and fall together, your portfolio is a significant risk. As a general consequence, most investors are now advising 20-40% of your portfolio be invested in managed futures. Most typical investment portfolios are comprised of stocks, bonds, and mutual funds which are often highly dependent upon the same factors.
What are the experts advising?
So the question is does your portfolio have 20-40% true diversification? If the answer is no, why not? You ought to be looking at more commodity futures in your portfolio. If you are a professional trader, it’s probably a wise idea to trade yourself. If you’re not, invest in a managed futures account or fund that has a steady track record of success.
