In a recent Wall Street Journal article, columnist Jason Zweig explains how investing in commodities can pay off.
Even though assets like oil and gas, corn, wheat, hogs and nickel have been, in Zweig’s words, “stinking up the joint ever since investors raced to buy them during the financial crisis,” he adds that new research suggests commodities “may deserve a small place in the portfolios of iconoclastic investors who have plenty of patience.”
The article offers insights from finance professor and co-founder of commodity-focused investment firm SummerHaven, Geert Rouwenhorst, who explains that commodities, as a group, can offer investors long-term returns since commodity producers are provided with “insurance” against falling prices through futures contracts—the purchasers of which wouldn’t enter the contract if they didn’t expect to collect a small premium. Zweig writes, “That helps explain how commodities, as a group, could provide a positive long-term return.”
Zweig adds, “It isn’t an easy ride, though. Commodities have fallen by at least 50% even more often than stocks and sometimes stay down for longer.” He cites SummerHaven data showing that the asset class halved in the mid-1980s, in the 1930s, the early 1920s and “for three decades in the late 19th century.”
That said, however, Zweig notes that the “long-term edge of commodities over cash is similar to that of U.S. stocks,” and the asset class tends to produce gains and losses at different times than equities, thus smoothing out performance for a diversified portfolio.
Zweig concludes: “None of this means you should rush into trading individual commodities—a challenge best left to professionals, many of whom struggle to excel at it.” But a smattering, he adds, could serve to slightly lower portfolio risk and raise returns—if investors hold tight and “don’t expect to get rich quick.”