Help me spice up my portfolio!

[yellow heel]

Hello all,

I was thinking of what is the best way of adding energy and commodities to my portfolio. I am think around 5% to energy and 5% to commodities.

Yes, I have looked at my overall asset allocation and these sectors (?) will accent it quite nicely (so I think).

So here is the question. What would be a good way to add these sectors to my portfolio?

I already have an account at Vanguard but their engery/precious metal (not commodities) is closed to new investors. I also have an account with fidelity so I have free access to fidelity funds to choose from. Or should I just go for etf?

Another question is energy and commodities too broad of a category too choose from? should I narrow it down more to like altenative enery and wheat (this is too specific) or something of this nature?

I just want something with the least correlation with the market to dampen the volitility of my portfolio.

TIA as usual!

[yellow heel]

I am not just saying this due to the surge in commodities or oil or the bear market. I have always contemplated about it but never took the leap.

I don't know if I want to buy just yet since they are at their peak... still watching.

[noppenbd]

Scott Burns (a well known Dallas columnist and financial advisor) wrote this article about the topic:

Making Commodities Part of your Portfolio - Registered Investment Advisor

He cites Israelsen research which showed that adding a small amount of Vanguard Energy, Fidelity REIT and Vanguard Metals and Mining improved the return of a typical portfolio from 1987 to 2006 without adding risk, and was superior to adding just a commodities portion to the portfolio.

Vanguard Metals and Mining is closed and Vanguard Energy has a $25K minimum. You could use the Vanguard Energy ETF (VDE) and either the Vanguard or Fidelity REIT funds or ETFs. Personally I have 10% VGSIX (Vanguard REIT) and 10% VDE (I follow Scott Burns' 10-speed portfolio).

[jIM_Ohio]

My thought is I would use commodities and energy for a portfolio I wanted to be stable- get consistent 5-7% returns. If I wanted higher returns (8-12%) I would look to other investments.

So while accumulating for retirement, bad
while spending money (retired) a great idea.

PRPFX has the energy stocks and gold/silver (commodities) you look for in one fund. I use this for cash I want "liquid", but earning higher than the 3% rates available on cash these days.

[Scanner]

This is the commodity I own:

SLV

It's an ETF and they actually physically own the silver vs. the other ETF which only holds a basket of silver futures.

I also regularly watch

USO, GLD, OIL, and DBO. . .also ETF's.

[yellow heel]

Thanks all for the reply.

NOP: I read the article. Quite interesting. This is the reason I am also thinking about putting money into commodities.

Jim: I looked into the permanent portfolio fund. VERY nice performance!! I might have to consider it as my anti inflation fund!! Where do you buy it from? Directly from Permanent?

scanner: Yes i also follow some of those etf to get an idea of how they react to the market conditions. But I think I want something more diverse then just say oil in the engery sector.

[Scanner]

Yellow heel,

DBO, and I haven't looked at the prospectus in awhile, owns a basket of futures in natural gas, sweet crude, etc. I think it's kind of a "fossil fuel" ETF vs. just the sweet crude like USO.

So that one is a little less volatile.

[jIM_Ohio]

Originally Posted by yellow heel

Thanks all for the reply.

NOP: I read the article. Quite interesting. This is the reason I am also thinking about putting money into commodities.

Jim: I looked into the permanent portfolio fund. VERY nice performance!! I might have to consider it as my anti inflation fund!! Where do you buy it from? Directly from Permanent?

scanner: Yes i also follow some of those etf to get an idea of how they react to the market conditions. But I think I want something more diverse then just say oil in the engery sector.

I buy PRPFX directly from permanent family of funds. There is a one time $35 fee to set up the account.

[noppenbd]

Originally Posted by jIM_Ohio

My thought is I would use commodities and energy for a portfolio I wanted to be stable- get consistent 5-7% returns. If I wanted higher returns (8-12%) I would look to other investments.

So while accumulating for retirement, bad
while spending money (retired) a great idea.

Israelson's study:

I looked first at the accumulation portfolios. (See "Accumulation Phase Portfolios," below.) In the aggressive portfolio, adding an alternative asset of any kind produced a higher return than the core [90% stock/10% bonds] portfolio alone. Energy had the greatest impact over this particular 20-year period ($104,786 versus $78,127). But Adding commodities improved the worst one-month percentage loss more than any of the other alternative assets, from -21.3 to -13.6%). Adding a composite mix of energy, real estate and precious metals to the core portfolio reduced the worst one-year calendar loss to -8.8% compared to -16.6% in the core portfolio alone.

Quasi-Commodities? - Articles - Financial Planning

[BTC]

Buy POT.

[jIM_Ohio]

Originally Posted by noppenbd

Israelson's study:

I looked first at the accumulation portfolios. (See "Accumulation Phase Portfolios," below.) In the aggressive portfolio, adding an alternative asset of any kind produced a higher return than the core [90% stock/10% bonds] portfolio alone. Energy had the greatest impact over this particular 20-year period ($104,786 versus $78,127). But Adding commodities improved the worst one-month percentage loss more than any of the other alternative assets, from -21.3 to -13.6%). Adding a composite mix of energy, real estate and precious metals to the core portfolio reduced the worst one-year calendar loss to -8.8% compared to -16.6% in the core portfolio alone.

Quasi-Commodities? - Articles - Financial Planning

Not enough data for me.

The study was 20 years 1986-2006. This included the biggest bull market in history and generally the 1990's were one of best decades to invest in any type of equity (energy or other).

I have read other (similar) studies which suggested that during draw down a 7 asset portfolio behaved better than a 6-5-4-3-2 or 1 asset portfolio.

Asset 1 large cap stocks
Asset 2 small cap stocks
Asset 3 foreign stocks
Asset 4 bonds
Asset 5 cash
Asset 6 REITs
Asset 7 commodities

The logic behind the study I refer to was that 7 assets (in equal weightings) kept the portfolio from having 3 year performance periods where the portfolio lost money, which is the single biggest risk when drawing down (drawing down when a portfolio lost money).

This article referred to this

Retirement portfolios are more fragile accounts since they are sustaining periodic withdrawals. (See "Retirement Drawdown Portfolios," below). The accounts were simulated by depositing $10,000 and then withdrawing $75 each month over the 20-year analysis period.

[noppenbd]

Originally Posted by jIM_Ohio

Not enough data for me.

The study was 20 years 1986-2006. This included the biggest bull market in history and generally the 1990's were one of best decades to invest in any type of equity (energy or other).

I have read other (similar) studies which suggested that during draw down a 7 asset portfolio behaved better than a 6-5-4-3-2 or 1 asset portfolio.

Asset 1 large cap stocks
Asset 2 small cap stocks
Asset 3 foreign stocks
Asset 4 bonds
Asset 5 cash
Asset 6 REITs
Asset 7 commodities

The logic behind the study I refer to was that 7 assets (in equal weightings) kept the portfolio from having 3 year performance periods where the portfolio lost money, which is the single biggest risk when drawing down (drawing down when a portfolio lost money).

Is this the study to which you are referring?

The Benefits of Low Correlation -

If you look at Figure 4 you see that the 7 asset portfolio also had the highest return over the 37 year period (1970-2006). Personally I would be ecstatic if my portfolio returned 11.5% while in the accumulation phase. Granted this 7-asset portfolio does not include energy, so there would need to be further data to incorporate energy into the model to see if it helps or hurts performance. But Israelson's other research showed that energy & REITs were a viable substitute for commodities so I think it is justified to draw the conclusion that substituting energy for commodities would give similar results to the 7 asset portfolio.

[jIM_Ohio]

That was the study I referred to. I have an issue with the math which leads to the conclusion of the article. I drew my own conclusions.

The conclusion I drew is that I did not need to add REITs, commodities or cash/bonds in heavy doses until portfolio stability was my core objective.

The returns of the underlying assets were not good enough to suggest I add them while accumulating.

The issues I had is the first 2 or 3 examples were not real (why have only 1 asset class- large caps stocks in this example- in an accumulation/growth portfolio). I then had an issue with each piece of portfolio being equally weighted. I guess it made sense for the paper, but there is more to draw down than just the asset classes. Taxes and income producing investments also factor into my plan.

Cash drained down the 5 asset portfolio... IMO the study should have been about a 6 asset porfolio and added cash as a 7th variable to numerous 5 asset porfolio's and the 6th. The order the paper presented the asset classes makes me think REITs and commodities improve returns, yet I don't expect to get a 10% annual return from either asset class (long term).

[noppenbd]

Jim, based on Figure 5 from the study it would not have made that much difference what weightings you gave between US Large Caps, US Small Caps and International, because the 37-yr returns were for US LC and Int were both around 11% and the SC return was 12%. So unless you were heavily weighted in SCs you would not have beat the 7-asset portfolio.

As far as the future returns of REITs and commodities/energy, to me a 37-year return is pretty long term. Have you read Bernstein's "Four Pillars"? He argues that future returns for equities may to be in the 5-7% range rather than the 10-11% we have seen in recent years. If that does end up to be the case I would not want to be 100% equities, even if alternative assets don't perform as they did in the 37-year period. I'll give up .5% return if it means I can hedge a little on future equity returns. Just my opinion of course. But I would argue it's not clear cut to say commodities & energy during accumulation is bad.

[sweeps]

Thread crapper here. Keep a diversified domestic and international stock portfolio. Forget about the other junk. Obviously I've been way early on this call, but eventually energy and commodities will tank. Stocks are way cheap now and will prevail as they always do.

[jIM_Ohio]

Originally Posted by sweeps

Thread crapper here. Keep a diversified domestic and international stock portfolio. Forget about the other junk. Obviously I've been way early on this call, but eventually energy and commodities will tank. Stocks are way cheap now and will prevail as they always do.

Yeah, this is my line of thinking. Past performance is no guarantee... yet we all use past performance to justify investing to some degree (if I expected only 7% returns from equities, I would be investing heavily in bonds- much less risk for about the same return).

[Scanner]

--------------------------------------------------------------------------------

Thread crapper here. Keep a diversified domestic and international stock portfolio. Forget about the other junk. Obviously I've been way early on this call, but eventually energy and commodities will tank. Stocks are way cheap now and will prevail as they always do.

Disagree with this one.

Remember the bull run of Microsoft and other technology had in the 80's and 90's?

There will be a bull run on energy like we have never seen before.

[sidney7]

Although it's impossible to predict, I personally would hold off on the energy until at least winter to see how it pans out. It may keep going up, who knows, but it definitely has had a major run-up that may drop back down. Either way if you do an ETF you will be safe in the long haul. What's your time frame? Energy over the next 5 and 10 years will almost certainly go up so if you aren't in a rush then I see no harm in buying now.

[yellow heel]

My time horizon is pretty long. I would say another 30 years or so.

Is there good etf or fund that concentrates on commodities? I think I can find plenty that focuses on energy.

[poundwise]

Originally Posted by yellow heel

Help me spice up my portfolio!

MKC







(Apologies. Please return to the topic...)